Gold or cryptocurrency: What do investors prefer?
Gold and Bitcoin are quite different in structure. The correlation between them is quite weak and even negative, so it is really hard to compare cryptocurrency and precious metals.
Will cryptocurrencies affect fiat currencies – the Dollar and Euro?
At the beginning of February, The Financial Times, in an article, drew a parallel between cryptocurrencies and the bubble that existed just over 100 years ago, which rose and fell rapidly. People who held savings in this asset would lose 100 percent of their money five times over. At different times, they could have made huge fortunes or seen hyperinflation destroy the value of their assets.
The asset referred to in the article is the gold stamps of Weimar Germany. Analyst Luke Gromen looked at the striking similarities in the volatility of the most prominent instances of gold investment and Bitcoins today. He concludes that Bitcoin is not so much a bubble as it is the “last working fire alarm,” warning us of very big geopolitical changes to come.
Ever since Nixon stripped the U.S. dollar, the global reserve currency, of its gold backing in 1971, currencies worldwide have gone wild. In other words, politicians have been given free rein to use the national “credit card,” the debt of which they have either increased or extinguished with printed paper money. This situation gradually spilled over from Washington to Brussels, through London to Tokyo, which easily explains how and why the global debt rose from $5 trillion in 1971 to $280 trillion today.
Central banks in recent decades have replaced all the classic tools that no longer help with quantitative easing. When quantitative easing doesn’t work, there is no other chance-the economy will start to fall. You can view the current situation with rose-colored glasses, or you can view it critically. Still, the fact remains that it is now very difficult to get a sense of the real state of individual companies and certainly the real economy as a whole by focusing on asset prices.
Ironically, modern politicians, eager to get more votes, have convinced themselves and the world that inflation is under control when the statistics are simply not true.
Due to high inflation in the U.S. markets and other developed countries, the price of gold in 2021 could not reach the peak price recorded in August 2020: $2,067 per troy ounce.
The reasons for this were:-
- A decline in investor interest in investing in gold. Since inflation is projected to be 2-2.5% over the next 1.5-2 years, preference was given to the more profitable cryptocurrency market. As of the end of August 2021, the cryptocurrency market was 10 times larger than the gold market at $2 trillion.
- Increased supply of gold. Thanks to the taken anti-epidemiological measures and the resumption of mining of the “yellow metal” in the first half of 2021, its production amounted to 2,308 tons, which is 4% more than the same period in 2020.
- The demand for gold in the investment market continues to remain at a low level, and the volume of open positions in the futures market has decreased from 568,888 at the beginning of 2021 to 507,113 in September 2021. These dynamics speak in favor of lower prices for the noble metal in 2022. However, experts say that the downward trend in gold prices will be hampered by increased demand for jewelry in India and China (the main consumers of this market segment) due to the removal of restrictive measures in 2021 and the increasing demand for gold from central banks. A gold price of $1,740 per troy ounce is forecast in 2022 (1.7% less than in 2020 and 3.5% less than in the first half of 2021).
However, the downward trend in gold prices will “break” after 2022, when prices for this metal will start rising again:-
- An increase in inflation rates of more than 2.5% and, in connection with this, the expected Devaluation of world currencies.
- Loss of the cryptocurrency as a protective asset in the investment portfolio.
- Production decreases of gold in South Africa, the United States, Australia, and Canada.
- The value of gold between 2023 and 2025 could reach $1,900 per troy ounce.