There are many ways investors can protect themselves against rising inflation, but boardroom and bedroom traders are locked in debate about the merits of two strategies, one old and one new: investing in gold or cryptocurrency Bitcoin.
Both have more or less fixed supply, gold due to the limited amount in the ground and Bitcoin due to its design, which means that there will only be 21 million coins ever in circulation, just 13pc more than there are today.
The theory goes that central bank money printing and government spending splurges will devalue regular currencies while increasing the value of ones, like gold and Bitcoin, that are cannot be tampered with.
Investors are betting that inflation will rise this year, reflected in the rise in the yield on British 10-year government bonds from 0.25pc to 0.9pc in 2021 so far. But the fortunes of gold and Bitcoin have diverged over the same period: the precious metal has lost 6pc since the turn of the year, while the world’s leading cryptocurrency has soared 93pc.
‘Bitcoin hasn’t proven itself yet’
The consensus among professional investors is that it is too early to say whether Bitcoin is a genuine inflation hedge because it has only been around since 2009, a period of relatively low inflationary pressures.
Ben Conway, of Hawksmoor Investment Management, said there were similarities between gold and Bitcoin but backed gold as a better inflation hedge, despite its poor performance this year.
“Bitcoin is having a big impact, and some people have definitely moved their gold money into Bitcoin this year, but it is too young an investment to assess whether it will be a genuine inflation hedge. Gold has a longer history so the burden of proof remains with Bitcoin,” he said.
He argued that gold was falling this year because bond yields, which move in the opposite direction to prices, were rising more quickly than inflation, which meant the real value of cash was rising.
“Gold is useful when the purchasing power of money is falling. This is when you get increasingly less from safe assets like government bonds compared with the rate of inflation.
“While the yield on bonds is still below the inflation rate, it has been moving in a positive direction this year, with yields shooting up. Real yields have become less negative which is why gold has fallen,” he said.
In addition, Mr Conway noted that gold had enjoyed a bumper year in 2020, rising almost 25pc, so a correction was overdue.
However, he still backed the yellow metal as a useful tool against inflation and an essential portfolio building block.
“Governments have printed a lot of money in the past year which could lead to high inflation. Over time gold has acted as a good store of wealth and has performed particularly strongly in periods of higher inflation,” he said.
Bitcoin was simply speculation, he argued, because its wild price swings had nothing to do with the broader investment climate.
“It is too volatile to be a serious investment. But you have to be humble. No one knows what the future holds and trust may continue to grow in Bitcoin. You can’t rule that out,” he said.
Bank of America took a stronger stance, saying that the only reason to own Bitcoin was if an investor thought its price would rise due to greater demand.
“The main argument for holding Bitcoin is not diversification, stable returns, or inflation protection, but rather sheer price appreciation, a factor that depends on Bitcoin demand outpacing supply,” it said.
It said the biggest driver of the Bitcoin price was interest in the cryptocurrency, which can be measured by Google search interest.
“The last two large Bitcoin rallies have been accompanied by a large increase in on-line interest in crypto, as Google trends show,” it said.
‘It’s gold 2.0’
But there is a growing cohort of investors, entrepreneurs and researchers who believe Bitcoin could become a genuine hedge against inflation and even take the place of gold.
Quant Insight, a research firm, found that stronger inflation expectations, as measured by rising bond yields, correlated with a higher Bitcoin price, a trend which had strengthened this year.
“Cryptocurrencies are many things to many people but, on current trends, Bitcoin offers a more efficient inflation hedge than gold,” it said.
Those involved in cryptocurrency are keen to make comparisons to gold. Tyler and Cameron Winklevoss, of cryptocurrency exchange Gemini, told CNBC that Bitcoin was like gold for the digital era and would become the go-to inflation hedge.
“I think a lot of people are starting to realise that Bitcoin is really the best defence against inflation. It doesn’t really need to be a great medium of exchange, it just needs to be better than gold and it’s better across the board.
“The supply is fixed at 21 million, while gold is not completely fixed. Bitcoin is software and it can be sent through the internet, like email. Gold is hardware and it’s hard to transport,” Cameron Winklevoss said.
Other fund managers doubt the credibility of gold as an inflation hedge, which might play into Bitcoin’s hands. David Coombs, of investment manager Rathbones, does not endorse investing in Bitcoin but said gold would not protect investors against inflation this year and recently sold his position.
“Gold as an inflation hedge is a myth. We have had inflation in Britain for the last 40 years and gold hasn’t gone up every year for 40 years,” he said.
Instead, he argued that gold was only valuable when investors lost faith in the real value of cash, such as during periods of disinflation and hyperinflation.
“It’s not good if we get steady, long-term inflation. With the yield curve rising, the cost of not owning gold is also rising as investors can get more from safe government bonds. This is bad for gold and explains why the price has fallen this year and could keep falling,” he said.