Costco did it. headline News Gold bars are selling out quickly this week. In times of economic uncertainty and rising inflation, it’s no surprise that investors turn to traditional safe-haven assets like gold. The question is whether gold’s performance will eventually push its price above $2,050 (last seen in early May).
Gold prices have soared an impressive 12% over the past 12 months. The rally has been driven in part by the Federal Reserve’s efforts to combat inflation by keeping interest rates higher, a move that benefits scarce assets like gold. While gold’s performance is laudable, it must be kept in perspective.
Over the same period, gold’s returns were roughly in line with those of the S&P 500 (up 15.4%) and the WTI Oil Index (up 12%). However, these gains pale in comparison to Bitcoin’s astonishing 39.5% gain. It’s worth noting, though, that gold’s lower volatility of 12% makes it an attractive option for investors looking to manage risk.
Risk-reward scenario favors gold
One of gold’s strongest selling points is its reliability as a store of value during times of crisis and uncertainty. Gold’s status as the world’s largest tradable asset, worth over $12 trillion, makes it a prime candidate to benefit from capital inflows whenever investors exit traditional markets such as stocks and real estate.
For example, during the height of the COVID-19 pandemic. In the 30 days to March 24, 2020, gold prices fell only 2.2%.
Data from Gold.org shows that central banks have become net buyers of gold for the second consecutive month, adding 55 tons of gold reserves, with China, Poland and Turkey purchasing larger amounts.
Bloomberg report Russia plans to increase its gold reserves by $433 million to protect its economy from volatility in commodity markets, particularly in the oil and gas industry.
Taking a closer look at the production data, Visual Capitalist estimates gold production in 2022 at about 3,100 tons, with Russia and China producing 650 tons. The World Gold Council also predicts that if gold prices continue to rise, total production may reach a record high of 3,300 tons in 2023.
A key metric to consider when assessing gold’s investment potential is its stock-to-flow ratio, which measures the commodity’s production relative to the total amount on hand.
related: S&P 500 falls to 110-day low, Bitcoin price remains stable
Over the past 12 years, gold’s stock-to-flow ratio has remained stable at around 67. By comparison, Bitcoin has experienced three scheduled halvings, effectively reducing its issuance, and currently has a stock-to-flow ratio of 59. This suggests that Bitcoin has a lower equivalent inflation rate compared to precious metals.
Bitcoin could outperform gold even with lower inflows
Bitcoin could outperform gold as the U.S. government shuts down due to hitting the debt ceiling, causing investors to seek alternatives to scarce assets. Bitcoin’s $500 billion market capitalization makes it easier for the price to rise even if its inflows are much smaller. Additionally, central banks may be forced to sell their gold holdings to pay fees, further increasing Bitcoin’s appeal.
There is also the possibility of discovering new gold deposits. While gold remains a stalwart in the safe-haven asset space, Bitcoin’s impressive gains and low equivalent inflation make it a strong contender for investors seeking alternative stores of value. Nonetheless, continued economic uncertainty and the Federal Reserve’s monetary policy will continue to favor both assets.
This article is for general information purposes only and is not intended to be, and should not be construed as, legal or investment advice. The views, thoughts, and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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