Costco has done Headlines this week after it quickly sold out of its gold bars. In times of economic uncertainty and rising inflation, it is no surprise that investors are turning to traditional safe-haven assets like gold. The question is whether gold’s performance will finally catapult its price above $2,050, a level last seen in early May.
In the last 12 months, the price of gold has risen an impressive 12%. This rally has been driven in part by the Federal Reserve’s efforts to combat inflation by maintaining higher interest rates, a move that benefits scarce assets like gold. While gold’s performance is commendable, it is essential to put it in perspective.
Over the same period, gold’s returns have roughly matched those of the S&P 500, which posted a gain of 15.4%, and WTI oil, which rose 12%. However, these gains pale in comparison to bitcoin‘s (btc) staggering 39.5% rise. Still, it is important to note that gold’s lower volatility (12%) makes it an attractive option for investors looking to manage risk.
Risk-reward scenarios favor gold
One of gold’s strongest selling points is its reliability as a store of value in times of crisis and uncertainty. Gold’s status as the world’s largest tradable asset, valued at more than $12 trillion, positions it as a prime candidate to benefit from capital inflows whenever investors exit traditional markets such as stocks and that of real estate.
For example, at the height of the COVID-19 pandemic, gold only fell 2.2% in the 30 days leading up to March 24, 2020.
According to data from the World Gold Council, central banks have been net buyers of gold for the second consecutive month, adding 55 tons to their reserves, with notable purchases by China, Poland and Turkey.
Bloomberg reported Russia plans to increase its gold reserves by an additional $433 million to protect its economy from volatile commodity markets, especially in the oil and gas industries.
Taking a closer look at production figures, Visual Capitalist estimates that approximately 3,100 tons of gold were produced in 2022, of which Russia and China accounted for 650 tons. The World Gold Council also predicted that if gold prices continue to rise, total production could reach a record 3,300 tonnes in 2023.
A crucial metric to consider when assessing gold’s investment potential is its stock-to-flow ratio, which measures the production of a commodity relative to the total quantity in existence.
Related: bitcoin Price Steady as S&P 500 Falls to 110-Day Low
Gold stock-to-flow has remained stable at around 67 for the last 12 years. In contrast, bitcoin has undergone three scheduled halvings, effectively reducing its issuance, and currently boasts a stock-to-flow ratio of 59. This suggests that bitcoin has a lower equivalent inflation rate compared to the precious metal.
bitcoin can outperform gold even with lower inflows
bitcoin could outperform gold as the US government nears a shutdown due to reaching the debt limit, prompting investors to seek scarce alternative assets. bitcoin‘s market capitalization of $500 billion makes it easier for the price to rise even if its entry is much lower. Additionally, central banks could be forced to sell their gold holdings to cover expenses, further increasing bitcoin‘s appeal.
There is also the possibility of new gold discoveries. While gold remains a stalwart in the world of safe haven assets, bitcoin‘s impressive gains and lower equivalent inflation rate make it a strong contender for investors seeking alternative stores of value. Despite this, the current economic uncertainty and the monetary policies of the Federal Reserve will continue to benefit both assets.
This article is for general information purposes and is not intended to be and should not be taken 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.
