The Fed’s tightening measures, which are expected to lead to a rise in interest rates and the strengthening of the dollar, are raising concerns among investors, who are looking for direction.
World stock markets have entered a state of alert ahead of the monetary offensive hatched by Fed Chairman Jerome Powell against inflation.
Similar to previous monetary moves, this time the process of adapting to a new interest rate environment consisted of several stages. First, investors examined the Fed’s seriousness, and it gradually permeated. Later, the emotional response came. At this point, the trends changed rapidly: the “fear index” soared, risk assets crashed, the bond market sought a new equilibrium and the foreign exchange market revived its periodic “risk order” – the Swiss franc and the Japanese yen again enjoyed demand and emerging market currencies were mercilessly abandoned.
After the Bitcoin fiasco, which from a niche speculative asset was supposed to grow to be the “new safe haven” or the “digital gold,” was it the turn of the old, secure golden age? Opinions in the market are divided: some expect success among millennial investors and return to the mainstream, while others are skeptical.
Here it is worth mentioning that despite the inflationary warming recorded throughout 2021, it is difficult to claim that this was the year of the yellow metal – about $ 9 billion, or about 173 tons, came from ETFs that give exposure to the price of gold (their assets are physically backed by gold ounces).
This was the largest exit since 2013, and it can be assumed that little interest from investors was the main reason for the decline in the price of gold last year, as the demand for the metal from jewelers, manufacturers and as a raw material for coins actually increased.
Will gold return to shine in 2022?
At the end of 2021, about $ 209 billion in assets, or about 3,570 tons of gold, were in the hands of those funds – by the way, still significantly higher amounts than on the eve of the plague. It turns out that the Corona panic has increased the volume of investment in gold like no other threat has done in the past – in 2020 ETF assets on gold increased by a record amount of about 875 tonnes.
It is interesting to examine what caused the reversal of the trend in 2021 and to conclude from this whether 2022 will restore gold to its lost luster. Among the economic factors for its abandonment are the expectation of interest rate hikes and the strengthening of the dollar. The appreciation of the dollar micromanages the ounce of gold for foreign investors, and high-interest rates increase the alternative cost of holding it, due to it being an asset that does not bear interest or pay dividends. It may be added that the end of the era of printing and the expectation of less extravagant policies on the part of the US government also affected the price of gold in his hat as a guardian of the value of money.
Those who followed the headlines in the media realized that the macro factors, important as they are, are only part of the story. Over the past year many investors, from novices to Wall Street seniors like Goldman Sachs and JPMorgan, have given cryptocurrencies the status of a legitimate asset in investment portfolios, and have not even ruled out one of them competing for gold as a hedge channel – or perhaps competing today.
The rationale is that the supply of many cryptocurrencies is constant. In the case of Bitcoin, only 21 million of it can be produced, and yes, every four years the amount of bitcoin that is mined is reduced by half. Thus, investors assumed that the scarcity of supply of currencies should affect their value more than traditional economic factors. In addition, this feature should make it immune to monetary extensions. These assumptions have so far not stood the test of time – crypto has plummeted along with other venture assets, Bitcoin funds have suffered from investor abandonment and funds on gold have enjoyed their entry.
If Bitcoin is not the new gold – what about the old?
If Bitcoin (or the like) is not the new gold, what about the old gold? How does it function as an asset that is supposed to protect against inflation? Unlike any other precious metal, gold has a fascinating history that began about 5,000 years ago. For a long time it was perceived as an attractive investment, often more than stocks and bonds or any other type of asset, not only thanks to the positive returns, but also as a safe haven in difficult times.
Since the 20th century, it has been customary to attribute its status as an inflation protector to a single founding event: About 50 years ago, in August 1971, then-US President Richard Nixon interrupted the broadcast of “Bonanza” – one of the most popular television shows of the time – to Announce that it is ending the peg of the dollar to gold.
Many consider this to be one of the most significant decisions he has made. By then foreign central banks had managed to convert US dollars into gold bullion at a fixed price of $ 35 an ounce. In theory, this linkage imposed strict monetary discipline on the Federal Reserve, as inflating the money supply could have resulted in the depletion of Fort Knox, where the U.S. stored its gold inventory.
Inflation did skyrocket in the years following Nixon’s decision to remove the limit, as did the price of gold, which today is 50 times higher than it was that day. This (alleged) correlation between gold and inflation has led many to believe that gold is a good inflation hedge. However, this belief is not supported by the data. If gold was a good and consistent hedge, the ratio of its price to the consumer price index was relatively stable over the years. This is not the case, as can be seen