Gold prices took a pummeling while stock markets rode the crest of a wave. But, based on the traditional view held by a number of investors, that the precious metal is best used as a hedge against inflation and when a safe-haven is required against falling prices, you would have expected gold to stage a rally when markets entered choppy waters.
The fact that the gold price has failed to shine and recover its value as rapidly as it has done in the past, when faced with a similar economic scenario, has prompted some analysts and investors to ponder whether the role of gold has changed, in the face of competition from other investment options such as digital currencies like bitcoin.
If you track the historical progress of bitcoin and gold prices, there was a period of about four years between 2008 and 2012, where values ran virtually in tandem, in an upward trajectory.
Although the price movements associated with bitcoin were more erratic than the gold price fluctuations at times, they both managed to end up in a similar state of popularity with investors. What happened after that period of virtual cohabitation in the eyes of market watchers, was that gold fell out of favor and bitcoin values managed to virtually triple in value, while gold prices dropped 25% in the same timeframe.
Too early for conclusions
We all know the problem with statistics and you can often make them work for your argument if you pick the right way of looking at a situation, and choose a period where the figures work in favor of your opinion.
It would definitely be wrong to assume that investors are now prepared to flee gold markets in favor of a new kid on the block such as bitcoin, which is what it is when you consider how long gold has played a part in our financial thinking.
The impact of QE
A major factor that heavily influenced gold and bitcoin rallies, was the monthly intervention of the Fed with their quantitative easing (QE) program.
Although there is an argument to support why the Fed intervened in such a big way, their actions did have the effect of undermining the perceived value of national currencies and also hinted that inflation could easily get out of control, without QE.
What happens with an action like QE, is that it doesn’t create the same response as more traditional monetary easing policies achieve. QE is not very effective in boosting aggregate demand or commodity prices, but can impact asset prices.
This form of intervention has proved to have a negative influence on gold prices.
Are bitcoins similar to gold in this respect?
Using this line of thinking and seeing what effect QE had on gold prices, you might reasonably think that bitcoins could be just as vulnerable to downward price pressures. Bitcoins and the concept of digital currencies in general, have certainly gained some credibility, and there are investors who are now prepared to view bitcoin as a viable alternative to gold, when looking for an instrument to shelter against a decline in the value of paper currencies.
A rise in the popularity of bitcoins has helped fuel a growth in demand for the digital currency, which in turn, has helped to boost the price accordingly.
In terms of deciding whether bitcoin is truly the new gold, it should be remembered that the bitcoin market is still thinly traded and largely unregulated in comparison to the established gold market.
This means that sentiment and prices could just as easily swing away from the digital currency and the conclusion has to be that whilst it can be a useful instrument, it could be a risk conclusion to reach that bitcoin is about to replace gold as the default safe-haven in times of trouble.