“Cryptocurrencies are an alternative to copper rather than gold when it comes to hedging inflation,” Jeff Curry, global head of commodities research at Goldman Sachs, told CNBC.
To protect themselves from inflation, the investor usually relies on gold as a safe haven, but some also see bitcoin as a modern replacement for bullion. These investments are seen as protection against the decline in the purchasing power of silver due to rising prices.
Gold reaches new heights
Gold price hit a five-month high on Tuesday. One troy ounce (31.1 grams) was temporarily worth $ 1,914.64 on the London Stock Exchange. Experts see inflation as the explanation. In the United States, annual inflation rose unexpectedly to a solid 4.2% in April, and prices are rising elsewhere as well. In the euro area, it stood at 2% in May, the highest since November 2018 and above the European Central Bank’s target of almost 2%.
Meanwhile, cryptocurrencies are in an insane leap forward. Bitcoin, for example, will grow more than 25% in 2021, but has fallen more than 25% in the past three months.
Speaking Tuesday on CNBC’s Squawk Box Europe, Jeff Curry said investors should not view digital currencies as a substitute for gold. “There is a correlation between bitcoin and copper to the extent that there is a similar appetite for risk,” he explains. “Bitcoin and copper act as an ‘at risk’ inflation hedge against gold that is considered a safe haven or risk free.”
Copper hit record highs in mid-May before falling sharply towards the end of the month before bouncing again last week.
“There is good inflation and bad inflation,” adds the head of Goldman Sachs. “Good inflation is when it’s demand driven, and that’s what bitcoin or copper covers.”
“Gold covers up bad inflation when the supply is limited, which … is focused on commodities.”
Inflation and “expected” rate hikes
In a note on Monday, Goldman Sachs suggested that commodities remain the best inflation hedge in general for investors seeking protection from a potential slowdown.
In the note, Jeff Curry’s research team noted that because stocks value earnings and growth expectations, they provide a good hedge against “expected inflation.” However, once inflation expectations become high enough to suggest that central banks may be forced to raise interest rates, stocks cease to be as useful as inflation protection, they argued.