Is Real Gold Leaving Digital Gold in Its Wake?

Is real gold racing ahead of digital gold? It is a good question. Over the last four trading sessions, this precious metal has reached a new eight-year high. Gold is now trading at $1,725 USD an ounce. In the first four months of 2020, gold has skyrocketed by 14 percent. When compared to other markets such as stocks, oil, copper, and aluminum, gold has put in an excellent performance.

Many investors see Bitcoin as digital gold to be used as a hedge against inflation. What has happened to Bitcoin in the same period? During the same four-month period, Bitcoin is down over four percent. This gap in returns is frustrating traders who believe the coronavirus-related stimulus package and emergency aid packages direct from the authorities will sooner or later, lead to inflation.

Global Economy Shrinking

The International Monetary Fund (IMF) is forecasting a drop in the global economy of three percent. This represents a drop of over six percent from the January 2020 projections. The global coronavirus pandemic has changed everything for everyone. Daily, we are witnessing disturbing disruptions to business, the travel industry in particular. Energy demand has cratered. Consumer spending has shrunk to a mere fraction of pre-pandemic numbers.

The speed and magnitude of industrial and commercial collapse is something that has not been witnessed in our lifetime.

Keeping Inflation at Bay

The US Federal Reserve is determined to keep inflation at bay. Vice-Chairman Richard Clarida has stated during a recent television interview with Bloomberg TV that the authorities have what it takes to keep the economy from deflation. In other words, more injections of money into the system are inevitable. For the first time in history, the Federal Reserve balance sheet sailed past $6 trillion USD.

The question begs. “Why isn’t Bitcoin enjoying the same uplift as gold?”

The chief investment officer of Arca Funds has put forward a possible reason for this anomaly. Gold is much easier to buy. This is doubly true for traditional investors who have historically turned to gold in a time of an economic crisis.

Buying Bitcoin is Still Difficult

Gold is no more difficult to buy than stocks or bonds. The purchase can be arranged through the same broker. This is not the case with Bitcoin. The Arca Funds executive went on to say that people sitting on cash need to put the money to work, and buying gold is far easier than buying Bitcoin. This explanation is entirely plausible. Gold has been a symbol of wealth since time immemorial, whereas Bitcoin is only 11 years old.

It is estimated that over 197 thousand metric tons of gold have been mined throughout history. Based on the current price of the metal, the outstanding value is near $11 trillion USD. That number is 87 times the outstanding market value of all the Bitcoin ever produced.

Some proponents see Bitcoin as an asset that has the opportunity of increasing portfolio returns while at the same time reducing overall risk and volatility. Although the overall correlation with gold remains weak, there is evidence that the correlation between the two may be growing. Even more interesting is the observation that Bitcoin appears to be trading in sync with inflation expectations.