THE blowout in the price of crytocurrency recently has thrown the spotlight on the asset class to which its backers most sought to compare it – gold.
Amid concerns regarding inflation and recession, the yellow metal has done what it’s always been able to achieve: retain its value. Investors in Bitcoin, however, appear to have lost belief as its value is down 70%.
What first seemed like a risk-off approach to Bitcoin is now resembling a meltdown similar in scope to “… the tangle of derivatives that brought down the global financial system in 2008”, according to a recent article by Bloomberg News.
This development supports views gold bulls have had some time regarding the differences between cryptocurrencies and the metal.
John Reade, a market strategist at the World Gold Council was cited in a recent Financial Mail article as saying that gold and cryptocurrency were vastly different asset classes. Gold is a diversifier in a portfolio that lowers risk while cryptocurrency adds risk given its correlation to equities, especially high growth shares, he said.
According to the council, just over half investors who bought crypto in 2021 also bought gold, suggesting the market thought this before Reade pointed it out.
“Gold is a unique precious metal which has emotional, cultural, functional and financial value,” said Alberto Calderon, CEO of AngloGold Ashanti.
Calderon thinks cryptocurrency has the characteristics of any tech speculative investment. “Its price goes down and more down as the market gets more nervous. So you can call bitcoin anything you like, but not a reliable safe haven to protect your portfolio again risk” he said.
Concern over global growth and geopolitical risk brought about by the war in Ukraine would trigger a response by central banks, according to a report by Bank of America (BoA) analysts.
Citing the World Gold Council, BoA believes up to 400 tons of the 3,985 tons in gold demand this year will be from central bank purchases, comprising about 10% of total. It’s worth noting that in the last 10 years, central bank demand has been as high as 15% of total physical demand.
“With the decisions by the US, Japan and the EU to prevent Russia from accessing the foreign currency reserves it held abroad, we think it is probable that central banks outside of these areas will be motivated to diversify their assets,” said BoA. “Timing is difficult to pinpoint. Ultimately, we think gold should see increased demand.”
Said Calderon: “Not surprisingly, the weekly price of gold has performed like it has for centuries — as a reliable safe haven for times of turmoil. If you are worried about risk growing in the market, gold is a reliable, safe asset to hedge against this.”