Investors are fleeing gold for cryptocurrencies as inflation concerns mount

Investors are dumping gold for cryptocurrencies as inflation rises, fleeing a metal historically touted as a store of value to buy digital assets that are little more than a decade old.

Gold prices fell 6.1 percent this year to $1,782 a troy ounce on Wednesday, according to Bloomberg data.

Bitcoin has now doubled this week to a record high of more than $67,000. Some investors have begun to view them and other cryptocurrencies as an inflation hedge, even though there was none during the world's last serious bout of inflation.

Experienced gold traders know that times are changing. “There is no interest in our strategy right now,” said John Hathaway, senior portfolio manager at Sprott Asset Management, a precious metals investment group. He added: “The Bitcoin crowd sees the same things I see in terms of the inflation risks of printing money.”

Gold has long been promoted as a hedge against the reduced purchasing power of fiat currencies like the dollar. Pent-up demand, choked goods supply chains and central bank stimulus have revived inflation worries that have typically supported gold markets.

However, the received wisdom does not play out in financial markets. The dollar has strengthened along with the U.S. economy and gold prices have fallen, with investors looking elsewhere for protection.

“There is now a tendency to view Bitcoin as a portfolio diversifier, with inflation being one of the catalysts,” said Mohamed El-Erian, president of Queens’ College, Cambridge and chief economic adviser at Allianz. “Bitcoin has drawn money away from gold.”

Paul Tudor Jones, the hedge fund manager, told CNBC on Wednesday that he prefers cryptocurrencies to gold as an inflation hedge.

According to Fidelity's latest Institutional Investor Digital Assets Study, which surveyed 1,100 professional investors, Bitcoin's lack of correlation with other asset classes and perceived potential to hedge against inflation contributed to its mainstream popularity.

More than half of hedge funds surveyed in Europe and the US said rising inflation was a key reason for their attraction to digital assets, with nearly eight in 10 of investors surveyed saying cryptocurrencies have a place in a portfolio.

“Institutional investors appear to be returning to Bitcoin, perhaps seeing it as a better inflation hedge than gold,” analysts at JPMorgan said this month.

Bitcoin was introduced in 2009, while gold has been traded for thousands of years. Fans of the cryptocurrency say its utility as a hedge against inflation comes from its design, which limits the maximum number of digital coins to 21 million. This is in contrast to the money printing measures that central banks have taken in response to the pandemic.

Some gold investors say the commodity's fortunes could change if inflation persists, undermining confidence in the Federal Reserve's mantra that rising prices are temporary and require more drastic monetary tightening.

They also pointed to Bitcoin's short performance history and price volatility as undermining its reliability as an inflation hedge.

“If my reservations prove correct, I think gold is poised for a significant rise,” said Sprott Asset Management’s Hathaway.