Is Bitcoin Taking The Sheen Off Gold?
UNIQUE TIMES|September - October 2021
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

Responding to the economic distress, central banks around the world stepped up monetary stimulus. The US Fed Funds rate was dropped to near zero, and from June 2020 onwards, they began a new round of quantitative easing to pump money and shore up the economy. The US Fed is currently injecting liquidity to the tune of US $ 120 billion every month by purchasing $80 billion worth of US treasury bonds and $40 billion worth of mortgage-backed securities (to support the real estate market). This money is all newly created money, in other words, created out of thin air.

Further, to alleviate distress among ordinary people, the US government also added fiscal stimulus as part of Covid relief. By the time Joe Biden took over as President, most Americans barring the wealthy had already received two payments of $1200 and $600 per person. After the passage of President Joe Biden’s $1.9 trillion American Rescue Plan in March 2021, millions of Americans have received a further one-time direct payment of up to $1,400 each. On top of all this, the US Federal government has been providing an extra weekly payment of US$300 to all its unemployed citizens (which expires in September 2021).

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