Growing nervousness over the crisis in Ukraine has propelled the gold price up by more than 5 per cent this month, but digital currencies are not being used as safe havens.
Investors have shunned cryptocurrencies such as bitcoin as tensions between Russia and Ukraine have escalated, and are instead seeking refuge in the more traditional safe haven of gold.
Gold has benefited from the ratcheting up of tensions between Russia and Ukraine, as skittish investors have sought out safe assets in which to park their cash.
Investors have long viewed gold as a store of value in turbulent times, which can often see the value of their other investments slump. Gold has gained more than 5 per cent this month, easily outperforming bonds and equities.
Some analysts predict gold is on track to beat its August 2020 record of more than $2000. AP
In trading last week, gold futures climbed above $US1900 a troy ounce, their highest level in eight months. This has prompted some analysts to predict that gold is on track to beat its August 2020 record of more than $2000.
(This marks a distinct change from earlier this year, when many analysts were tipping that the gold price would struggle in 2022, as rising US bond yields would dent the appeal of the precious metal, which, unlike bonds, doesn’t provide investors with regular coupon payments.)
The threat of an imminent European war, however, has not prompted investors to pile into digital currencies, which have often been touted as the next generation’s disaster hedge.
In contrast, the price of bitcoin has been flat so far this month [bitcoin is presently trading at just under $US39,000]. What’s more, the bitcoin price – which climbed as high as $US45,855 just under a fortnight ago – has declined despite the growing geopolitical tensions.
Of course, geopolitical tensions aren’t solely responsible for the rise in the precious metal. The gold price is also finding support from stronger physical demand.
China’s gold consumption rose by more than a third last year, as the country’s economy recovered from the coronavirus pandemic, and as Beijing gave domestic and international banks permission to import large amounts of gold.
Consumption in the world’s largest gold consumer jumped 36.5 per cent in 2021 compared with the previous year. It was also up by almost 12 per cent from 2019, before the pandemic struck.
And central banks’ interest in gold is also picking up, with Turkey adding 1.6 tonnes to its holdings last month, while Poland has signalled that it could add 100 tonnes this year.
Meanwhile, El Salvador’s failed experiment with bitcoin is likely to discourage other developing countries from using digital currencies to diversify their foreign currency reserves away from the US dollar.
Last September, El Salvador became the first nation in the world to make bitcoin legal tender, which meant that it could be used to be used to buy goods, send remittances and even pay taxes.
But the decision that is estimated to have cost the country tens of millions of dollars, due to the steep drop in the bitcoin price.
Meanwhile, discussions International Monetary Fund, from which El Salvador is seeking more than $US1 billion in financing, have stalled due to concerns that the use of bitcoin is reducing financial transparency.
The IMF has urged El Salvador to drop bitcoin as legal tender, and has expressed concern over its plan to issue bonds linked to the digital currency.
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Gold regains safe haven lustre while bitcoin struggles – The Australian Financial Review