Guided readingGlobal inflation is high, gold and bitcoin are not rising but falling, has the investment logic changed? The value of these assets is likely to stabilize and improve later in a recession when the Fed lowers interest rates or stops raising them.
As global inflation intensifies, CPI figures for many countries, including the US and Europe, are still high. Most investors flocked to the safe haven of the US dollar, but two assets, gold and cryptocurrency, previously regarded by the market as anti-inflation magic, underperformed.
As of Friday, the US dollar index has maintained an upward trend, with a cumulative increase of 18.17%.
Note: the trend of the US dollar index since the beginning of the year
Indeed, the US dollar benefited from the Federal Reserve’s interest rate hike and was highly sought after by investors. The Fed can raise interest rates to make the dollar more attractive, so this scarcity makes assets like gold and bitcoin more resistant to rising inflation.
So far, the Fed has raised interest rates by 300 basis points. Previously, interest rates had increased by 25, 50, 75 and 75 basis points in March, May, June and July, respectively. This year is also the most aggressive monetary tightening policy since the Fed began using the overnight funds rate as its main monetary policy tool in 1990, surpassing 1994 (the cumulative rate hike in that year was 225 basis points).
Gold and cryptocurrencies retreated, Bitcoin fell more than 70% over the year
But on the other hand, gold and cryptocurrencies have not made investors money and have even seen profit taking.
Note: the performance of COMEX gold futures this year
From a gold trend perspective, the COMEX gold futures price has returned from a high of $ 2,000 in March this year to $ 1,646.6 today, a drop of more than 17% over the period. .
“Gold appears to protect purchasing power over a long period of time – say more than 100 years – but it has little protection against short-term inflation,” said Kevin Lum, founder of CFP and Foundry Financial.
Lum also said, “The dollar has strengthened and reached its highest point in two decades. With the global economy slowing, investors are pouring into the dollar, which is seen as a safe haven during periods of global economic uncertainty. So when the dollar strengthens, gold investments tend to underperform. ”
Additionally, Lum pointed out why gold is used as a tool to fight inflation, because between 1972 and 1980, when inflation was high in the United States, gold rose from $ 38 an ounce to more. of $ 600 an ounce.So anyone who went through that historical period will always believe that gold is the ultimate hedge against inflation。
In addition to gold, cryptocurrencies were once highly sought after by the market, but after entering in late 2021, the relative trend began to decline. Taking Bitcoin for example, the currency fell from a record high of $ 67,000 in November to $ 19,029, a period of decline of over 71%.
Note: Bitcoin movement since the end of March 2020
Financial planners at Cereus Financial Advisors noted that the previous rally in cryptocurrencies was due to extremely low interest rates, which made risky assets attractive. But in the context of rising interest rates, the market has reduced the demand for this currency, limiting liquidity.
Financial planners also noted that the value of these assets could stabilize and improve in the later stages of a recession when the Fed lowers interest rates or stops raising them.
(Source: Financial Associated Press)
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