The rollercoaster investment landscape of 2022 continued to fly off the rails last week with the news that FTX, one of the largest crypto exchanges led by wunderkind Sam Bankman-Fried, had been using customer deposits to make unauthorized trades.
This forced the firm into bankruptcy, put Bankman-Fried into the crosshairs of regulators, and shattered confidence once again in the burgeoning crypto industry. The image of cryptocurrencies as an asset class will be damaged for a long time. Stay away from crypto investing until the dust settles, as money will be flowing out of the space at least through the end of the year.
Crypto Money Flows to Gold
But where will that money go?
Investors had flocked to the crypto industry, particularly Bitcoin (BTC-USD), to defend against rising inflation that accelerated after the excessive money printing that happened post-Covid-19. If you cannot put your capital into crypto assets due to uncertainty about future regulation and the risk of total loss from exchange deposits being “stolen,” where can you go to find a place to store our wealth and keep your purchasing power in this current sticky inflationary environment?
Thankfully, there is an asset that has withstood the test of time, that defends against paper money debasement, and protects against inflation. John Maynard Keynes referred to it as a “barbarous relic.” That asset is gold and it is time to buy.
I see four major reasons to buy gold now. First, investors continue to look for a “store of value” asset because money printing is not going anywhere anytime soon. Gold will now see the reverse of money flows that had gone into the crypto space over the last several years. After the FTX debacle, investors will flock back to the safety of gold as they remain concerned about paper money debasement.
Santa Claus Seasonality Is Gold’s Friend
Secondly, gold is entering into its seasonally strong period for the year. Gold has been up in the month of December five years in a row and has also been higher in January seven of the last nine years. While investors often associate the Santa Claus rally with equities, gold historically has experienced many of these same inflows as investors re-position portfolios into year-end.
Third, this year has seen tremendous U.S. dollar strength on back of the interest rate hiking cycle from the Federal Reserve. This tightening has started to impact various parts of the economy, especially in interest-rate-sensitive sectors like housing and autos. I think the interest rate hikes will continue into early 2023 to keep trying to slow inflation, but eventually, concerns of a growth slowdown will take over and the Fed will likely pause its rate hiking agenda. Historically, gold tends to anticipate these changes in Federal Reserve policy and will start to outperform as investors begin to believe the Fed is closer to adding liquidity back to the system. As this liquidity will lead to a weaker dollar, gold will be a strong beneficiary.
Weaponization of the Dollar Aids Gold’s Allure
Lastly, with the war between Russia and Ukraine, the United States has weaponized the dollar by placing sanctions on Russia’s USD reserves for its behavior. As Russia has been forced to sell its commodities away from the U.S. dollar, it has increasingly been settling transactions in non-USD currencies like the Chinese yuan and Indian rupee, but is also looking to settle more transactions in gold.
Over time, as more foreign governments and central banks see how the United States can use its sanctioning power over the dollar to hamstring their ability to trade and to save, we will continue to see more of them using gold as a neutral settlement asset. Central banks, particularly in emerging markets, continue to accumulate gold as a store of value out of fear that at some point in the future, the United States may see them as a possible enemy actor.
Gold should have a place in everyone’s portfolio. One’s exposure should depend on the current risk observed in the financial system and the extent to which foreign governments and central banks will resort to money printing again to fix their problems. Amidst a slowing-growth world with still-elevated inflation, one that is deglobalizing and seeing a pick-up in geopolitical strain, gold is a must own.
Since central banks are likely to print money again, raising your exposure to gold here provides a great ballast to your portfolio and will protect you from inflation better than crypto assets ever could.
On the date of publication, Craig Shapiro held long positions in Bitcoin and gold. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.