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 either lowers interest rates or stops raising them.
With global inflation intensifying, the CPI data of many countries including the United States and Europe are still high. Most investors flocked to the safe haven of the U.S. dollar, but two assets, gold and cryptocurrencies, previously considered by the market to fight inflation, underperformed.
As of Friday, the US dollar index maintained an upward trend, with a cumulative increase of 18.17%.
Note: The performance of the US dollar index since the beginning of the year
In fact, the U.S. dollar benefited from the interest rate hike by the Federal Reserve and was highly sought after by investors. The Fed can raise interest rates to make the dollar more eye-catching, 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 were raised 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 started using the overnight funds rate as its main policy tool in 1990, surpassing 1994 (the cumulative rate hike in that year was 225 basis points).
Gold and cryptocurrencies have retreated, Bitcoin has fallen by more than 70% during the year
But on the other hand, gold and cryptocurrencies did not make investors profit, and even saw profit-taking.
Note: COMEX gold futures trend this year
From the perspective of gold trends, the price of COMEX gold futures has retraced from a high of $2,000 in March this year to $1,646.6 today, a drop of more than 17% during the period.
“Gold appears to protect purchasing power over a long period of time — say more than 100 years — but has little protection against inflation in the short term,” said Kevin Lum, founder of CFP and Foundry Financial.
Lum also said, “The dollar has strengthened and has reached its highest point in two decades. As the global economy slows, investors are flocking to the dollar, which is seen as a safe haven during times of global economic uncertainty. So when the dollar strengthens , gold investments tend to underperform.”
In addition, 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 soared from $38 an ounce to more than $600 per ounce.So anyone who lived 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 the end of 2021, related trends began to fall. Taking Bitcoin as an example, the currency fell from a record high of $67,000 in November to $19,029, a period of decline. 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 risk assets attractive. But in the context of rising interest rates, the market has reduced 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 either lowers interest rates or stops raising them.
(Source: Financial Associated Press)