The performance of bitcoin and gold has diverged dramatically of late, but that doesn’t mean bitcoin is going to replace gold.
Many have wondered whether gold has lost its shine. Certainly over the past 20 years, that’s not the case, but more recently the performance of gold has been lackluster. For 2021, gold is down about 9%, while other asset classes such as equities, real estate and even the dollar have risen higher. The latter, often moving counter to gold and other metals, is up about 3% for 2021.
So what is bringing gold down? Extreme government monetary stimulus was supposed to bring “wild” inflation to the U.S. and the rest of the world. The heavy liquidity has been a boon for the stock market, with the S&P 500 rising nearly 90% since the depths of late March 2020. Inflation is starting to simmer, though, and that would normally be a signal to goldbugs everywhere to start buying the metal. But curiously, that hasn’t occurred yet.
Bitcoin, on the other hand, is up in 2021 an astonishing 99%! This coming off a remarkable 302% gain in 2020. Pandemic or not, investors and traders were more than interested watchers of bitcoin. The outperformance vs. gold and other asset classes is stunning, and many pundits are predicting enormous price rises by bitcoin into the future. Just two years ago, we heard of some “wild” predictions of bitcoin reaching “$100K within a couple of years.” Those people were laughed and mocked at then, but with bitcoin now selling around $58,000, it’s not that crazy anymore to consider that target a likelihood.
But what about gold? Have governments passed on diversifying with the yellow metal permanently in favor of other asset classes such as currencies? Are the old models of inflation and currency de-basing no longer relevant? Or is bitcoin soon to become the new store of exchange, replacing fiat currencies altogether, as more investors abandon the dollar, euro, yen and yuan? These are all important questions to ask as we continue to see more adaptation to this mysterious cryptocurrency.
I, for one, do not believe that bitcoin will replace gold. Bitcoin will have relevance and have a place for trade and exchange as more banks and firms come around to it. But in the end, gold is still going to be the metal of choice for most investors, as has been the case throughout history.
If inflation does somehow get out of control, bitcoin won’t be the asset that major investors will turn to, that’s for certain. Bitcoin offers little to no protection against inflation, and it is not tied or correlated to any currency. In the short run, gold may be under-appreciated. But we don’t have to wait for the metal to start heating up. Having some gold, and even some bitcoin, for diversification purposes is a smart way to go.
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