Tuesday, February 7, 2023
HomeMarketBitcoin's Crash Could Bring New Life to Gold

Bitcoin’s Crash Could Bring New Life to Gold

Central banks may be more interested in holding gold after Russia lost control of hundred of billions of dollars of reserves held overseas following its invasion of Ukraine.

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David Gray/AFP via Getty Images

For the past few years, the
industry has been on the defensive against a new threat: cryptocurrencies. No longer.

Advocates of crypto argued that Bitcoin was a better version of gold because its supply is even more limited than for the yellow metal, and it’s more appealing to a new generation. The theory was that Bitcoin would hold up as well as or better than gold in times of hyperinflation. What’s more, people can carry all their Bitcoin on their smartphone. Try doing that with a brick of gold.

But the crypto downturn and several major failures within the crypto industry have taken some of the shine off digital coins. Bitcoin hasn’t proved to be an inflation hedge. In fact, it has traded more like other high-risk assets, including tech stocks, that thrive during eras of low interest rates but struggle when inflation causes central banks to tighten monetary policy. Meanwhile, crypto trading platforms have proven vulnerable to hacks and fraud.

Gold is trading around $1,800 an ounce, about where it was when the year began. The
SPDR Gold Trust
(ticker: GLD) is down 0.3% this year, far better than the 15% decline in the
S&P 500.

is down 63%. 

Francisco Blanch, head of commodities and derivatives research at Bank of America, said on Thursday that crypto’s downfall is one reason he is bullish on gold. The bank sees prices rising to $2,000 an ounce in 2023.

“For the last three or four years, the gold market has been obsessed with Bitcoin,” Blanch said. “But now with crypto assets collapsing so much, I think people are going to say, ‘Is it really that safe to put your money into some of this crypto, or should we be looking back at some of the more traditional stores of value like gold?’ I think that alone will bring investment back into the equation.”

There are other reasons for his bullish stance. In the next few months, the Federal Reserve is likely to slow the rapid increases in interest rates it has used to fight inflation, before halting those hikes altogether. The Fed’s aggressive battle this year against inflation—and the high interest rates that investors have been able to get in other low-risk assets like Treasuries —have hurt the case for buying gold. But as the Fed slows its fight, gold’s appeal should become clear again.

Gold is also a particularly attractive asset in a world where global alliances are shifting, and a central bank’s financial assets are vulnerable to restrictions. Russia lost control of hundreds of billions of dollars worth of central-bank reserves held overseas when they were sanctioned after its invasion of Ukraine. The move against that money “is going to tilt a lot of central banks around the world to buy more gold,” Blanch said.

He isn’t the only one who is bullish heading into next year. In a note published Thursday, J.P. Morgan also wrote that gold should thrive in 2023, though the bank’s price target is lower. “With the Fed on pause, decreasing US real yields drive our bullish baseline outlook for gold and silver prices over the back half of next year and we forecast gold prices will push up to average $1,860 an ounce in the fourth quarter of 2023,” wrote strategists at the bank.

Write to Avi Salzman at avi.salzman@barrons.com

Credit: marketwatch.com

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