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Why gold and cryptocurrencies are not “inflation-proof” investments

Gold and cryptocurrencies are often lumped together as inflation-proof assets, but with prices rising at the fastest pace in decades, neither asset has fared well in the face of rising inflation in 2022.

Bitcoin, the world’s most popular digital coin, has fallen almost 71% since September 23 from its all-time high of $65,000 in November. Gold prices were also down almost 20% on Friday from their recent peak in March.

Cryptocurrencies are often referred to as “digital gold” because, like gold, they are speculative assets that can theoretically be used as currency.

Also, the supply of gold and cryptocurrencies like bitcoin is much more constrained than that of the US dollar, which can easily be increased by the Federal Reserve. In theory, such scarcity should make these assets more resilient to rising inflation.

But with prices rising at the fastest pace in decades, that hasn’t been the case.

How crypto has performed as an investment in 2022

Cryptocurrency prices suffered a setback earlier this year after the Federal Reserve began raising interest rates to fight inflation. Bitcoin’s price has fallen to nearly a third of its early pandemic peak, topping just above $18,000 on Sept. 23.

“I believe that crypto’s rise prior to this year was due to extremely low interest rates, which made risky assets attractive,” says David Haas, Certified Financial Planner (CFP) at Cereus Financial Advisors.

“People can borrow and invest in crypto and other assets with little to no interest. When interest rates rise, this liquidity disappears and suddenly the demand for it disappears [these] Wealth disappears.”

Haas says the value of these assets could stabilize and improve later in a recession if the Fed either cuts interest rates or stops raising them.

How gold has performed in 2022

Despite gold’s long history as a scarce commodity, the price of gold has fallen to $1,645 as of Sept. 23, well below the March high of $2,069.

And historically, gold has had a mixed track record as a hedge against inflation.

“Gold appears to protect purchasing power over the long term – say 100 years – but offers very little protection against inflation in the short term,” said Kevin Lum, a CFP and founder of Foundry Financial.

A key factor in gold’s performance was the strength of the US dollar, which hit its highest level in two decades this week. With the economic slowdown in China and Europe, investors have flocked to the dollar, seen as a safe haven in times of global economic uncertainty. However, gold investments tend not to do well when the dollar is strong.

When asked why gold has a good reputation as an inflation hedge, Lum replies that recency bias may be a factor.

“Between 1972 and 1980, gold went from $38 an ounce to over $600 an ounce. Anyone who has lived through this period in history will forever be convinced that gold is the ultimate hedge against inflation.”

Gold prices during this period were the result of an asset bubble linked to the end of the gold standard in the US, he says. Since then, gold has proven to be an unreliable hedge against inflation.

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