Coins & Money

The Path of Gold and Bitcoin in 2022 With Rising Interest Rates & Inflation

Gold bugs have some serious thinking to do in 2022. The same can be said for the “Bitcoin bulls.” The worst kept secret for 2022 outside of international strife and high inflation is that the Federal Reserve is going to raise interest. Three times, maybe even four times. The number of hikes will ultimately depend on many factors. but they are also supposed to start to shrink the Fed’s $8.8 trillion balance sheet. People own gold for many reasons, one of which is supposed to be a hedge against inflation. The same is supposed to be true for Bitcoin and other cryptocurrencies.

One problem that gold investors face is that gold frequently fails to act as a true inflation hedge. Whether or not Bitcoin will be a solid inflation hedge remains to be seen. Still, if you read social media posts about Bitcoin and other cryptos — “protection from inflation” is touted by HODLrs every hour of the day.

The World Gold Council’s outlook for gold in 2022 has some insights into where gold prices might be heading. Gold closed out 2021 approximately 4% lower than 2020 at $1,806 per ounce. One key driver was gold ETF outflows. At the start of the fourth quarter in 2021, the Council observed that ETF outflows had the gold demand down 7% year over year and down 13% from the second-quarter alone.

There is no “World Bitcoin Council” that has been around since 1987 (like the ‘WGC’), but the interest in Bitcoin has been high. And similar to gold, the price of Bitcoin (and many other alt-coins) is down substantially from the highs in 2021.

Similar to the SPDR Gold Shares (NYSE: GLD), there is an exchange-traded product for Bitcoin futures via the ProShares Bitcoin Strategy ETF (NYSE: BITO). Despite the fund being down 27% so far in 2022, the fund was able to claim the fastest growth to $1 billion in assets. The website shows that the most recent assets under management were $1.04 billion even after the big drop.

With so much interest in Bitcoin and cryptocurrencies in 2021, it is at least worth asking what would happen if you substituted “Bitcoin” (or a basket of cryptos) in every forecast or outlook commentary where “gold” is mentioned.

Collectors Dashboard knows that many collectors and investors own gold (and silver too) in coins or in exchange-traded funds. We also know that many collectors now own Bitcoin and/or other cryptocurrencies, and now maybe via exchange-traded products which own Bitcoin futures.

Fed Chairman Jerome Powell had already embarked on an effort to juice inflation higher before this inflation arrived. Powell is not even bother to try to claim that inflation is “Transitory.” This changed the Fed’s benchmark from the 2.0% to 2.5% longstanding goal. How high a new benchmark will be remains to be determined. Gold bugs and Bitcoin HODLrs may want to band together to remind Jerome Powell about the adage of “be careful what you wish for.” After all, you may get it.

As 2022 kicks off, inflation has crept up to almost 7%. It has impacted everything and consumers are paying far higher prices on almost every single consumer item. So where does all of this leave the outlook for gold in 2022 and beyond? And what about for Bitcoin?

Savings accounts basically earn 0% interest. That has allowed gold and bitcoin to have almost zero competition from short-term Treasury yields and from bank account interest. As interest rates start to rise, this is a competitive force that will lure some traditional gold buyers back into interest-bearing accounts. That is just how it is supposed to work. Will that be the same for Bitcoin?

The World Gold Council does warn that gold may face similar dynamics in 2022 as it faced in 2021. It noted that “competing forces support and curtail its performance” and that the speed central banks tighten are key. The good news for gold bugs is that the World Gold Council has stated the effect of rate hikes may be limited. It has also said that elevated inflation and market pullbacks are both likely to sustain demand for gold as a hedge.

The Gold Council does offer a historical perspective on rising interest rates and the behavior of gold prices. They have been operating since 1987, and some of the original had already experienced the market moves of the 1960s and 1970s. Also worth noting is that interest rates were much higher in the 1980s than in the modern era. Here is how the Council sees the pulling effect of interest rates:

Gold has historically underperformed in the months leading up to a Fed tightening cycle, which would be a “now” timeframe. They have noted that the price of gold has significantly outperform in the months following the first rate hike. Conversely, U.S. equities have tended to enjoy their strongest performance ahead of a tightening cycle but delivered softer returns thereafter.

Bitcoin simply does not have the same amount of performance history to evaluate against rising interest rates that gold has. Bitcoin is barely a decade old, and many of its owners have owned it for a year or less. It is undeniable that the interest in Bitcoin has also taken over some of the interest that would have otherwise sent money flowing into gold (and silver).

One firm that has issued a Bitcoin price target is AvaTrade. That target of $100,000 by the end of 2021 has not yet been seen. Bitcoin was last seen at about $42,200 and after approaching $70,000 back in November of 2021. Many other market pundits have opined that Bitcoin could rise into hundreds of thousands of dollars.

Goldman Sachs has issued a hypothetical $100,000 target for Bitcoin, although that is a 5-year view. The Goldman Sachs view was based on Bitcoin’s finite supply being perhaps 20% less than he stated limit of 21 million coins. The firm also sees Bitcoin flipping gold’s store of value asset within five years.