Gold's Performance Amidst Economic Uncertainty
Costco made waves recently when it quickly sold out of gold bars. In times of economic uncertainty and rising inflation, it's no surprise that investors are turning to traditional safe-haven assets like gold. The question on everyone's minds is whether gold's performance will eventually push its price above $2,050, a level last seen in early May.
Gold's Impressive Rally
In the past 12 months, the price of gold has surged by an impressive 12%. This rally has been partially fueled by the Federal Reserve's efforts to combat inflation by maintaining higher interest rates, which benefits scarce assets like gold. While gold's performance is commendable, it's important to put it into perspective.
Bitcoin vs Gold: A Comparison of Returns
Over the same period, gold's returns have roughly matched those of the S&P 500, which saw a gain of 15.4%, and WTI oil, which increased by 12%. However, these gains pale in comparison to Bitcoin's staggering 39.5% rise. Still, it's important to note that gold's lower volatility at 12% makes it an attractive choice 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 during times of crisis and uncertainty. As the world's largest tradable asset, valued at over $12 trillion, gold is well-positioned to benefit from capital inflows whenever investors exit traditional markets like stocks and real estate. For example, at the height of the COVID-19 pandemic, gold only dipped by 2.2% in the 30 days leading up to March 24, 2020.
Central banks have also been net buyers of gold for the second consecutive month, adding 55 tons to their reserves. Notable purchases have been made by China, Poland, and Turkey. Russia is also planning to bolster its gold reserves by an additional $433 million to shield its economy from the volatility of commodity markets, especially in the oil and gas industries.
Production Figures and Stock-to-Flow Ratio
Visual Capitalist estimates that approximately 3,100 tonnes of gold were produced in 2022, with Russia and China accounting for 650 tonnes of this total. The World Gold Council predicts that if gold prices continue to rise, total production could reach a record high of 3,300 tonnes in 2023.
Another crucial metric to consider when evaluating gold's investment potential is its stock-to-flow ratio, which measures the production of a commodity relative to the total quantity in existence. Gold's stock-to-flow has remained stable at around 67 for the past 12 years. In contrast, Bitcoin has experienced 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.
The Potential of Bitcoin
Bitcoin's performance could surpass gold's if the U.S. government approaches a shutdown due to reaching the debt limit. Investors may seek alternative scarce assets, and Bitcoin's $500 billion market capitalization makes it easier for the price to jump even with smaller inflows. Additionally, central banks may be compelled to sell their gold holdings to cover expenses, further boosting Bitcoin's appeal.
Conclusion
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. However, ongoing economic uncertainty and the Federal Reserve's monetary policies will continue to benefit both assets.
