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Avoid Crypto Volatility with Gold in 2022



Volatility is an intrinsic factor in buying any asset. What goes up in value can go down, and you might find yourself out of pocket due to shifting sentiment in the markets.

While there is no guarantee of how the gold price will perform, long-term trends show that the precious metal tends to retain its value and as a consequence, gold has historically been seen as a stable store of wealth compared to other investment assets.

Now, challengers like Bitcoin have been dubbed ‘digital gold’ by some. The gold price shows much more stability in the past performance than the notoriously volatile Bitcoin but there are some similarities. So, is Bitcoin here to replace gold? Or is there a better option to be found in how the two assets can work together in a portfolio?

Gold price vs. crypto

If you were to trace the price of gold historically, you would see a remarkable amount of stability over long periods of time in nominal terms. There have been marked spikes in gold, in the stagflation era of the 1970s, the commodity boom of the 2000s and the COVID-19 pandemic since 2020. But gold rises in value gradually compared to cryptocurrencies.

Price rises in gold are often associated with falls in the US dollar, as seen when the Bretton Woods system was ended in 1971. Other price rises have been associated more recently with high levels of uncertainty in the markets, due to economic crises and shocks to the global economy. Gold prices have occasionally been subject to some volatility but there has been a logic to the trends that move the gold market overall. Not only that, but gold starts on a sound footing, having had high intrinsic value for generations as a precious metal which doesn’t oxidise. Gold has also been used as the basis of currencies for generations, giving it the perception of being a sound source of value.

Cryptocurrencies, in comparison, are prone to greater volatility, and the price movements they experience are much faster and subject to speculation. Bitcoin, for example, has experienced multiple bubbles over the last decade, often lasting barely a few months, before crashing and losing a large percentage of its value in a short space of time.

Since its last peak in November 2021, Bitcoin has lost roughly a third of its value, reflecting how much could be at stake by investing in crypto in the current climate. Gold, by comparison has managed to stay stable in price terms, giving you an idea how radically differently gold and cryptocurrencies can behave.

The investment community is very clear on its thoughts about cryptocurrencies. Mark Northway, investment manager at Sparrows Capital, went as far as to claim cryptocurrencies lack intrinsic value. Mr Northway added: “Indeed, it [the price of cryptocurrencies] is determined by only one thing – confidence.

“Confidence in what? Pure crypto assets produce no cash flows and no economic output. Their price is an equilibrium point between those who think it will increase and those who think it will fall. This extreme dependence on supply and demand means that there is no natural price limit on the upside, and that the downside is limited only by zero.”

The crypto community, however, sees massive potential as the market starts to mature enough to show cycles of uplift. For Bitcoin, these cycles show correlation with the currency’s ‘halving’ mechanic which sees the reward for miners cut in half every 210,000 blocks mined – this equates to a change roughly every four years. More on the halving from Investopedia here.

In short, if the miners are getting less Bitcoin for the same amount of work, the price of Bitcoin is likely to increase to make the miners’ work worthwhile and some investors are now planning around this assumption.

Balancing risk

One of the key drivers of price changes for any commodity is the tension between supply and demand. Gold is a finite resource, and according to a gold survey by Thomas Reuters GFMS, there are 171,500 tonnes of gold on the planet. Warren Buffet, one of the world’s most famous investors, claimed that there is so little gold in the world that you could melt it all down and produce a single cube measuring 20 metres on each side. Precise estimates for the amount of gold in the world can vary, but what is clear is how little of it there is.

Bitcoin and some other cryptocurrencies emulate this with an upper limit on supply. But the traditional view of gold as a safe haven does not extend to cryptocurrencies; here investors accept that there is a high level of risk associated with the potential for a very high level of reward.

Many are now starting to see potential in this dichotomy and putting the two assets to work hand in hand. When the crypto markets look ready to take one of their downward turns, investors move across into gold as an historically more stable hedge. As cryptocurrencies pick up again and quick wins look likely, investors move back in and ride the wave up.

Nothing is certain in the investment markets. But as new trends and patterns establish themselves, investors are finding new ways to work things to their advantage and bring some level of balance to their portfolio.

For those looking to add that level of balance to their portfolio, physical gold bars and gold coins offer a tangible investment. Whether you hold the gold in your own safe or in our secure storage facilities, buying gold coins and bullion bars from The Gold Bullion Company means you know exactly where your money is.

In recent times, demand for gold has risen as more people see the benefit of choosing a precious metal which has been known to hold great intrinsic value for centuries. As inflation eats into savings and wages, gold offers a safe harbour to store your money. If you wish to learn more about buying gold, get in touch with the Gold Bullion Company today.


Article Last Updated: Monday, January 31, 2022