Gold Yields Are Bottoming Out, Despite Rising Inflation
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Gold Yields Are Bottoming Out, Despite Rising Inflation

When everything becomes internet-powered, gold's appeal as an inflation hedge shines less than Bitcoin.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

As a traditional safe haven in times of rising inflation, the price of gold might have been expected to appericate over the last two years. Yet, Bitcoin took the hedge inflation torch and ran with it ahead of gold.

Gold Underperformed During “Transitory Inflation”

During 2021, the Federal Reserve has been claiming that rising prices were just a result of ‘transitory inflation’. Now the Fed is claiming that inflation may continue into next year, with a possible ‘cooling off’ period at some point in 2022.

“It’s frustrating to see the supply chain problems not getting better, in fact they are probably getting worse,”
— Jerome Powell at the virtual ECB Forum on Central Banking 2021

Although the Fed’s forecasts have already failed multiple times, its power and influence cannot be underestimated. In fact, Peter Schiff, a gold investor, noted in April that most investors believe the Fed’s transitory inflation narrative. This, Schiff claimed, was the reason for gold’s poor performance, and not investors opting for Bitcoin instead.

Fast-forward to October, and it became clear that inflation’s extended “transitory” definition was not very confidence-inspiring. Schiff said that gold’s eventual rally was proof of it being a superior hedge against inflation, with Bitcoin being a “cheap imitation”.

However, after last August’s brief rally, gold’s hedging power against soaring inflation seems to sputter rather than retain a consistent upward trajectory.

Even with countless inflation headlines, gold struggles to be taken as a superior inflation hedge over Bitcoin. (image credit: TradingView)

The question is, which one is a better store of value, Bitcoin or gold?

Bitcoin vs. Gold As Stores of Value

Both Bitcoin and gold share a deflationary commonality. They are rare and difficult to mine. By the economic law of supply and demand, their scarcity places pressure on their price to continue to rise over time. This is exactly what has happened with gold over the last 50 years.

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Within 50 years, gold went up from $2,088 USD/kg in 1973 to $57,774 USD/kg presently, a 27x gain investment. However, in the last five years, Bitcoin outperformed gold by over 8,200%. On top of that, Bitcoin has gained large market cap gains — growing from less than 1% of gold’s market share to now having nearly 10%. This places Bitcoin at 8th, between silver and Tesla.

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While this may be expected from a deflationary cryptocurrency, the more pertinent question to ask is whether gold has better long-term sustainability than Bitcoin? There are pros and cons to both assets:

  • Physical gold can be kept independently without maintenance vs. Bitcoin that must be maintained by a network of computers to be accessible.
  • Gold represents an unchangeable periodic element (Au) as a fact of nature vs. Bitcoin which represents a cryptocurrency among thousands of others.
  • Physical gold must be carried and safeguarded as an object vs. Bitcoin’s infinite fungibility and mobility. With a BTC wallet seed phrase, one can carry all the wealth in the world inside one’s head, which is not possible with gold.
  • Bitcoin is a native digital asset, making it easy to integrate into decentralized finance (DeFi) protocols which can replace banks, such as Wrapped Bitcoin (wBTC).

Moreover, it appears that the gold market is heavily manipulated, according to the University of Sussex Business School study. Even so, the same could be said of Bitcoin:

“As the S&P 500 crashed in March 2020, gold had its worst week in eight years when it should have been its best, because of massive shorts on COMEX gold futures. Bitcoin has also been driven down by some pretty obvious manipulation bots on the unregulated crypto derivatives exchanges, especially BitMEX.”

Nonetheless, the first Bitcoin futures ETF launched last week, reaching a $1 billion valuation within 24 hours — three times faster than gold’s ETF. Likewise, 10-year US Treasury notes – debt the US government sells – yield only 1.48% annually, well under the present inflation rate of 5.4%.

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Bitcoin’s Digital Nature Gained More Traction than Gold

In the meantime, since the pandemic crashed the market in March 2020 and triggered inflation, Bitcoin went up by 678% while gold went up by only 21%.

(image credit: TradingView)

This not only makes Bitcoin robust but also “anti-fragile”, a term popularized by Nassim Taleb. This means that, under economic duress, Bitcoin becomes even stronger. In contrast, the central banking system can be viewed as a fragile system, always having to be delicately tweaked by experimental Modern Monetary Theory (MMT) policies.

After all, we have seen Michael Saylor of MicroStrategy play this contrast to the full extent.

Lastly, it is quite telling that some projects have already tokenized gold. Case in point, AurusGOLD (AWG) is fully collateralized by gold, with each AWG token redeemable for 1 gram of gold.

The future of finance could one day be run on the blockchain, whether in the form of CBDCs or cryptocurrencies. DeFi represents Finance 2.0, largely running on Ethereum, Solana, Avalanche, Polkadot, and other smart contract blockchains. It is a rapidly expanding world of digital assets, from deflationary cryptocurrencies to memetic NFTs and yield farming governance tokens.

Digital assets are recognized by Bank of America as the first transformational wave in the evolution of finance. These assets may not be physical, but they are more flexible, and interchangeable across blockchains.

If gold is tokenized to participate in this new ecosystem, this could put under question Peter Schiff’s claim that Bitcoin is only a cheap imitation of gold.

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