Should I Buy “Digital Gold” For Inflation?

Jerome Powell, Fed chair extraordinaire, is likely to announce interest-rate hikes in 2022 to combat inflation, which is at record levels and climbing: Consumer prices were up 6.8%, year-over-year, in November!

Piles of gold Bitcoin tokens stacked together.
Source: kitti Suwanekkasit /

This is a difficult situation for stocks. Not all companies can quickly and easily pass along higher costs to consumers, so inflationary headlines tend to spook the market. That leaves us with two choices: Watch inflation take its toll on our investments as well as our credit-card bills… Or buy assets that keep us a step ahead of inflation.

Sure, the Fed’s whole move is intended to fight inflation – but Powell admits that “supply and demand imbalances…have been larger and longer lasting than anticipated, exacerbated by waves of the [COVID-19] virus.”

“As a result, overall inflation is running well above our 2% longer run goal and will likely continue to do so well into next year,” Powell concedes. In fairness, the culprits he’s naming as the cause of elevated inflation numbers are pretty far outside the central bank’s control.

This is the market environment when your dad or your grandpa might start buying gold. Younger investors, however, are looking at Bitcoin (CCC:BTC-USD), which shares some key characteristics with gold. In fact, it may actually be a better inflation hedge, depending on your timeframe, as we’ll get to later.

Interestingly – while the Federal Reserve did not weigh in on Bitcoin with regard to inflation – Powell does seem to be coming around on cryptocurrencies in general (and stablecoins in particular). Here’s what he said in Wednesday’s press conference:

“The concerns [with cryptocurrency] are not so much current financial stability concerns… Stablecoins can certainly be a useful, efficient, consumer-serving part of the financial system, if they’re properly regulated. Right now, they aren’t. And they have the potential to scale… and you could have a payment network that was immediately, systemically important… In terms of the cryptocurrencies that are really speculative assets, I don’t see them as a financial stability concern at the moment.”

Powell did also stress that you should “understand what [you’re] getting” before you buy. To that end, here’s a closer look at how Bitcoin compares with the more traditional inflation hedge – gold.

Bitcoin vs. Gold

As an investment, it’s most useful to think of Bitcoin by its common nickname, the “digital gold.” That’s what it was programmed to be, with its limited supply of 21 million bitcoin, of which 90% has already been mined. (That compares to about 80% of gold reserves, by the way.)

Over the long term, the value of gold has gone up substantially – but from year to year, month to month, or even day to day, it can swing wildly.

Remember all those ads you see to “SELL YOUR GOLD!” in times of economic crisis? And how you don’t see them any other time? Yeah, that’s why. Trading gold shares (or derivatives like options) can be fun… If that’s your personality type. But in the end, you’re probably better off sticking it under a mattress.

Bitcoin is just like this; in fact, it’s an extreme example.

BTC can go 50% in your favor – or against you – in the blink of an eye. “Every year, Bitcoin makes all of its gains in 10 days and if you don’t own Bitcoin for those 10 days, you’re down 25% a year,” noted Tom Lee, head of research for FundStrat Global Advisors, earlier this month. “To me, the kind of weekend massacre that happened is painful, but that’s pretty common.” But then, as years go by, bitcoin can go up 1,000s of percent!

Crypto bears will highlight that gold has intrinsic value. Gold can be made into jewelry and whatnot; Bitcoin is just 1s and 0s on a computer.

But the “digital gold” metaphor actually holds up here, too. The blockchain technologies that go into the Bitcoin network (and that of other cryptocurrencies) have unique intrinsic value. That’s why old dusty companies like IBM (NYSE:IBM) are investing in blockchain technology. It’s just a way to complete transactions more securely, accurately, and quickly, without needing a middleman (who’s definitely going to price-gouge you for it).

“But gold is a hard asset,” they’ll counter. “Real money is something you can hold in your hand!” Really? Most of us get paid, buy things, and save the rest – all without seeing Benjamin Franklin or George Washington’s face on a paper bill – the vast majority of the time. Even “gold bugs” mostly own gold shares these days, versus physical gold.

And gold, remember, is downright hard to use for payments. Bitcoin, at least, is being accepted at more and more places these days. Whether you think that will continue – and how long it’ll take – is up to you. But, all in all, the “digital gold” aspect of Bitcoin would be the most compelling reason to, well, open up your wallet.

However…before you do… remember:

Timing Is Everything

Cryptocurrencies are the future; there are a ton of exciting projects going on here. But just remember to approach them like any other investment:

Decide the timeframe you’ll be investing for before you decide how to proceed.

In the past six months, for example, bitcoin has performed much better – as gold has been downright disappointing. Rather than doing its job against inflation, gold has actually been pretty flat, precisely as “inflation,” “supply chain,” and “labor shortage” dominated the headlines!

Chart: Bitcoin vs Gold - past 6 months

Zoom out to the year-to-date, and that’s still pretty much the case… but bitcoin’s notorious volatility really becomes apparent. BTC doubled by April, swung back to the flatline by July, doubled again through November, then crashed back to +62.3% YTD:

Chart: Bitcoin vs Gold, 2021 year to date

All this to say, if you are looking for a short-term inflation hedge, I’d point you to better options. The Vanguard Short-Term Inflation-Protected Securities ETF (NASDAQ:VTIP) has, apparently, seen record inflows. And at least you’d start earning dividends adding up to a 3.4% yield… While gold has nothing to offer on that front.

In fact, gold is really only useful if you hold on tight for decades! Check out how gold has moved going back to 1979. You’ve got to wait 30, even 40 years for the type of returns you’d come to expect from most other asset classes:

Chart: Gold price since 1979

Now, if you’re looking one year – or three, five, 10 years – down the road, that’s when you want something that can really move. And if that’s your timeframe, and you’re mindful of the factors we’ve discussed here today… Your most appealing option could be to buy Bitcoin for inflation.

On the date of publication, Ashley Cassell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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