Is Bitcoin Taking The Sheen Off Gold?

The US Fed has printed money at a frenetic pace after the pandemic, and the run-up in inflation has already begun. In April this year, US consumer price inflation registered an increase of 4.2% over the year, with equally hefty increases in the months following. Yet, the gold price has not gained as conventional wisdom would suggest.

- V.P. Nandakumar

I write in continuation of my earlier article “Gold: Outlook for 2021 and the competition from cryptocurrencies” published in the February 2021 issue of this magazine. In that article, I had looked at how investors, uncomfortable with the surge in money printing by central banks, have fuelled a rush of money into digital cryptocurrency. The returns on gold during the calendar year 2021 were far outstripped by the multi-fold rise in Bitcoin and other digital cryptocurrencies. Consequently, investors wary of the US dollar in this age of unprecedented fiscal and monetary stimulus were shifting a part of their portfolio from gold to bitcoins. The size of the market for cryptocurrencies had reached a third of private-sector gold investments in just a decade. I had concluded with the observation that had Bitcoin not emerged as an alternative, gold prices would have continued to move up to new peaks.

Now, looking at subsequent developments, in FY 2020, gold prices were steadily on the ascendant and closed with substantial gains of more than 24%. However, in FY 2021, gold did touch a record of USD 2,062 per ounce on 7 August 2020 but all the gains were given up by the end of the year to close flat at USD 1,685 per ounce. This was, of course, the year that bore the brunt of the pandemic. Due to prolonged lockdowns and other containment measures, the world economy had suffered much damage. The US GDP plunged by 32.9% (annualised) in the June 2020 quarter while the full-year GDP declined 3.5%, it's the worst year since World War II ended. Likewise, India’s GDP contracted by a record 23.9% in the June 2020 quarter while its full-year GDP for FY 2021 shrank by 7.3%.

Central banks respond to the pandemic