Next Gen Investing

Gold and crypto have been called 'inflation-proof' investments—so far in 2022, neither seems to be a great hedge

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Gold and cryptocurrencies are often lumped together as inflation-proof investments, but with prices rising at their fastest pace in decades, neither asset has performed well amid rising inflation in 2022.

Bitcoin, the world's most popular digital coin, is down nearly 71% from its all-time high of $65,000 in November, as of Sept. 23. And gold prices were also down nearly 20% as of Friday, from their recent March peak.

Cryptocurrencies are often referred to as "digital gold" since, like gold, they're speculative investments that can theoretically be used as currency. 

Plus, the supply of gold and cryptocurrencies like bitcoin is much more restricted than that of the U.S. dollar, which can be easily increased by the Federal Reserve. In theory, such scarcity should make these assets more resistant to rising inflation.

But with prices rising at their fastest pace in decades, that hasn't been the case.

How crypto has performed as an investment in 2022

Prices for cryptocurrencies took a beating earlier this year, after the Federal Reserve started raising interest rates to combat inflation. The price of bitcoin has dropped to nearly a third of its early pandemic peak and was just above $18,000 as of Sept. 23. 

"I believe that the rise in crypto prior to this year was due to the extremely low interest rates, making risk assets attractive," says David Haas, a certified financial planner (CFP) at Cereus Financial Advisors.

"People can borrow with little to no interest and invest in crypto and other assets. As interest rates rise, this liquidity disappears and suddenly the demand for [these] assets goes away."  

Haas says that the value of these assets might stabilize and improve later in a recession, when the Fed either lowers or stops raising interest rates. 

How gold has performed in 2022

Despite gold's longstanding history as a scarce commodity, gold prices have declined to $1,645 as of Sept. 23, well off a March peak of $2,069.

And historically, gold has a mixed track record as a hedge on inflation.

"Gold seems to protect purchasing power over a long period of time — say, 100-plus years — but provides very little protection against inflation in the short term," says Kevin Lum, a CFP and founder of Foundry Financial.  

One big factor in gold's performance has been the strength of the U.S. dollar, which hit its highest point in two decades this week. With the economic slowdown in China and Europe, investors have flocked to the dollar, which is considered a safe haven during times of global economic uncertainty. However, gold investments don't tend to perform well when the dollar is strong

Asked why gold has a reputation as an inflation hedge, Lum replies that recency bias might be a factor.

"Between 1972 and 1980, gold went from $38 an ounce to over $600. To anyone who lived through that period in history, you'd forever be convinced that gold is the ultimate hedge against inflation." 

Gold prices during that time were the result of an asset bubble related to the end of the gold standard in the U.S., he says. Since that time, gold has proven to be an unreliable hedge against inflation.

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