For several years, the gold industry has been on the defensive in the face of a new threat: cryptocurrency. Now it is not.
Bitcoin was expected to perform as well as gold, or even better, during periods of hyperinflation. Bitcoin supporters used to say it was a better version of gold because its supply is even more limited than the yellow metal, and it is more attractive to the younger demographic. In addition, consumers can store all their Bitcoin on their phones. Try doing that with a gold brick.
However, the crypto slump and many notable failures in the crypto business have dulled the shine of digital currency. Bitcoin has not proven to be an effective inflation hedge. In reality, it has traded more like other high-risk assets, such as tech shares, which prosper when interest rates are low but suffer when inflation forces central banks to tighten monetary policy. Meanwhile, cryptocurrency trading platforms are also vulnerable to cyberattacks and fraud.
When it comes to gold, it sells at $1,800 per ounce, almost where it was at the start of the year. The SPDR Gold Trust (GLD) is down 0.3% this year, significantly less than the S&P 500’s 15% fall. In contrast, Bitcoin (BTCUSD) has dropped 63%.
Francisco Blanch, Bank of America’s head of commodities and derivatives research, stated on Thursday that the decline of cryptocurrency is one of the reasons he is optimistic about gold. Prices of gold are expected to rise to $2,000 per ounce by 2023, according to the bank.
“The gold market has been obsessed with Bitcoin for the last three or four years,” Blanch said. “But now, with digital assets collapsing so dramatically, I believe people will ask, ‘Is it really that safe to put your money into some of this crypto, or should we be looking back at some of the more classic stores of value like gold?'” I believe that alone will restore investment into the equation.”
There are other explanations for his positive mood. In the coming months, the Federal Reserve is expected to moderate the pace of the rapid interest rate hikes it has used to fight inflation before ending them altogether. The Fed’s strong war on inflation this year and the high-interest rates offered in other low-risk assets, such as Treasuries, have weakened the case for buying gold. However, gold’s appeal should become brighter when the Fed softens its approach.
Gold is also an appealing asset in a world where global alliances are shifting, and central banks’ financial holdings are subject to restrictions. When Russia was sanctioned following its invasion of Ukraine, it lost control of hundreds of billions of dollars in central-bank reserves stored abroad. The action against that money “will influence a lot of central banks throughout the world to buy more gold,” Blanch predicted.
He isn’t the only one who is optimistic about the next year. J.P. Morgan likewise predicted that gold will thrive in 2023 in a report issued on Thursday, though the bank’s price target is lower. “With the Fed on hold, decreasing US real rates support our optimistic baseline estimate for gold and silver prices in the second half of next year, and we forecast gold prices to average $1,860 an ounce in the fourth quarter of 2023,” stated the bank’s strategists.