Is Gold losing its lustre as a hedge asset in Comparison to Bitcoin?
The aim of a hedge asset is to
protect your finances from risky situations. The higher the risk of loss, the
greater the importance of protection against it. However, rarely does a hedge
investment completely eliminate your potential loss.
Gold still holds the value of a hedging
instrument simply because of the fact that it lacks credit or default risks.
Gold prices go up when interest rate goes down; which is directly proportional
to the strength of the economy. So, in a broad sense, gold is a hedge against a
falling economy.
Gold is also extensively used
as a hedge against inflation. Hard assets, such as natural resources including
gold, silver and real estate hold intrinsic value because of their limited
supply. It is interesting to note that when a crisis spooks financial markets,
gold becomes a good asset for hedging to absorb the shocks in equity, bond and
oil markets.
People see gold as a way to pass on and preserve
their wealth from one generation to the next. When official currency loses its
purchasing power to inflation, gold tends to be priced in the base currency
(mostly US dollar) and, thus, has a tendency to rise in local currency terms.
Moreover, gold is seen to store a good value than local currency.
Although the price of gold can
be volatile in the short term, it has always maintained its value in the longer
run.
However lately, critics are developing adverse
feeling for bullion, and its capability to hedge against moves in other assets,
such as stocks, as well as inflation. While it is a reasonable store of value
over the long-term (decades) – it is less reliable across most smaller
investment horizons. Bullion has lost ground in 2021 as the recovery from the
pandemic gains more traction and Treasury yields surged. However, it was still
demonstrating a strong inverse relationship with the US currencyIn the current
scenario, gold should be thought of as a dollar hedge.
Economists feel stocks or
Bitcoin are now better positioned to hedge against long-term inflation for
investors. Carefully selected stocks can definitely help protect you against
long-term inflation. Stocks have produced the highest inflation-adjusted return
of any major asset class over the long term.
However, Bitcoin’s history is short to make any
robust conclusions about its inflation-hedging capabilities.
Bitcoin has risen as an alternative anti-fiat
asset. It has been popular because of the libertarian anti-government ideas
that have accompanied the digital currency since its inception. Bitcoin can
facilitate instant cross-border payments and remittances without restriction
from central authorities.
There is circumstantial
evidence that some money has flowed directly from gold into Bitcoin.
Institutions appear to be making a decision to allocate some money to Bitcoin
as a hedge against a fiat collapse.
Bitcoin’s performance over the last year is
directly aligned to the movement in bond yields. When yields rise, so does
Bitcoin. This implies that the digital currency benefits directly from the
‘reflation trade’ — or the belief that inflation is coming.
Bitcoin and gold are both inflation-sensitive,
but gold is happiest when the world faces a downward spiral. In contrast,
Bitcoin prefers a stronger economy, when the yield is rising.
Gold is good for slightly
higher inflation, but not necessarily much higher real interest rates. Gold,
which is a hedge against uncertain economic conditions, is now less in favour
owing to an increased risk appetite fuelled by fiscal stimulus programmes of
central banks worldwide. Though the precious yellow metal can also have big
drawdowns, but nothing like the epic losses that bitcoin periodically inflicts
on its holders before rallying again.
As Bitcoin’s declines tend to be three-times
bigger, risk can be equalised by holding three times as much gold as Bitcoin.
Demographic trends confirm that the tide is
turning, with many younger investors preferring digital assets over metals. For
example, only 7.5% of millennials aged 25-34 own gold and silver, while among
affluent millennials, 25% own cryptocurrency (and 31% are interested in
acquiring it). Bitcoin has many of the symptoms of a speculative mania; like
gold, its value is in the eye of the beholder.
It has no intrinsic value. Bitcoin has nothing
straightforward to fall back on. Official action might easily limit use of the
digital asset if it grew big enough to challenge the government’s monopoly of
currency issuance. An estimated 20% of all Bitcoins are stuck in wallets to
which people have lost the keys. Most places won’t accept Bitcoin, and
transactions are often slow and expensive, occasionally taking days or costing
more than $25 each when the network is congested.
The computations required to
maintain the Bitcoin blockchain alone consume as much electricity as a
mid-sized country, making a significant impact on climate.
The supply of gold isn’t completely static, it
rises at about 1.25% a year as more is mined. It can be expensive to store and
tricky to transfer around the place in its physical form. It is easily
confiscated and cannot be divided and distributed in a hurry. Bitcoin has none
of these drawbacks.
The supply is inelastic and
capped (only 21 million digital coins will ever exist out of which 18.638
million Bitcoins have been mined till February). You can send it around the
place as easily as you would an email (as long as you don’t lose the codes that
allow you to access it). It’s fungible, resilient, verifiable, independent of
any government and crucially, easily divisible.
Analysts and crypto currency investors expect
higher targets for Bitcoin over the long term if Bitcoin becomes a “gold
disrupter”, and no upper limit at all if it ends up being commonly used as a
payments network rather than just another asset to hold and pray over.
Demand for gold is driven by its perception as a
superior ‘anti-fiat’ asset. If people are worried about the long-term buying
power of government-issued currencies, they will be prepared to pay more for
gold, with its perceived role as a store of value.
Large debt borrowed by the
governments across the globe and by corporates also raises the spectre of
stress on repayments, when again gold may come back in favour.
There are numerous advantages that, at this
point, gold poses over cryptocurrencies as a store of value and medium of
exchange. These benefits make it hard to believe that gold will ever lose its
luster as a store of value and an inflation/currency hedge
· * Long-term price stability.
· * Secure storage in vaults.
· * Custodian oversight of gold or silver individual retirement
accounts.
· * Real-world industrial utility.
· * Proven longevity over millennia.
Mature investors want a portfolio protector that
has a multi-millennium record in the safe haven top spot.
Here is where gold scores well. With gold, volatility
can be managed because production can accelerate or decelerate in response to
demand, but you don’t have that for bitcoin. Relative to other assets, it might
continue to be slightly more volatile, even after market structure has matured
completely.
Going by the rising popularity of bitcoins,
investors could keep buying them (like stocks) in good times and rising yield
scenarios, while gold could continue to be the ultimate hedge against bad
times, inflation and currency debasement.
#Gold
#Bitcoin
Happy Investing
Source : Economictimes.com
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