Should You Dump Gold and Buy Bitcoin to Protect Against Hyperinflation?

By Elizabeth Blessing on March 12, 2022

Gold as an investment to protect against hyperinflation has redeeming qualities that appeal to many investors. One of these is gold’s potential to increase in value as fiat currencies—such as the U.S. dollar and British pound sterling—take a beating during times of high inflation.

Despite this benefit, some investors are moving out of the gold market in favor of Bitcoin and other cryptocurrencies. On the face of it, this may seem like a risky strategy. However, there are Bitcoin enthusiasts who believe the digital currency offers some unique benefits that shine brighter than the best of gold’s advantages.

The threat of hyperinflation

The difference between inflation and hyperinflation is that with inflation, what costs a dollar today can cost $1.05 or $1.10 next year. With hyperinflation, that cost could be $1.50 next month, and $50.50 next year. Economists define hyperinflation as a monthly inflation rate of 50% or more.

Hyperinflation can result when governments try to paper over social, political, and economic catastrophes by printing money that eventually becomes worthless. There have been examples throughout history where hyperinflation destroyed the fabric of a society.

For example, during the 1920s, in the aftermath of a devastating war and the onerous conditions of the Treaty of Versailles, the German mark depreciated to where one American dollar could purchase over 4.2 trillion marks. Germany’s defaulting on its war reparations debt unleashed a chain of events that culminated in World War II.

Today, as the global economy recovers from two years of production slowdowns, we are seeing the impact of the massive spending programs that governments worldwide created to provide short-term economic relief. This increase in the money supply has combined with pent-up consumer demand for goods and services, along with supply chain shortages and disruptions.

The result has been the highest inflation since the 1980s. Consumer prices in the U.S. were up 7.5% as of January 2022. In the UK, the Office for National Statistics reports an annual increase of 4.9%.

Will we have hyperinflation? What the experts say…

While troubling, the high inflation rate does not come near the 50% monthly rate needed to qualify for hyperinflation. But that has not stopped some from sounding the alarm about the possible need to protect against hyperinflation. Twitter co-founder Jack Dorsey posted this dire prediction: “Hyperinflation is going to change everything. It’s happening… [hyperinflation] will happen in the U.S. soon, and so the world.”

Dorsey is not alone in his assessment. In a recent report, the Deutsche Bank compares the current fiscal stimulus to what happened after World War II, a time when high inflation was rampant.

According to the Deutsche Bank: “An explosive growth in debt financed largely by central banks is likely to lead to higher inflation… Rising prices will touch everyone. The effects could be devastating, particularly for the most vulnerable in society. Sadly, when central banks do act at this stage, they will be forced into abrupt policy change which will only make it harder for policymakers to achieve the social goals that our societies need.”

High inflation more likely than hyperinflation

Some experts say that inflation will slow as the supply pipeline catches up with demand and labor shortages correct themselves. So, the problem is not the need to protect against hyperinflation, but a continued threat of rising inflation.

“We’re seeing very substantial inflation,” said Warren Buffett at the annual meeting of Berkshire Hathaway shareholders. When discussing Clayton Homes, one of Berkshire Hathaway’s companies, the legendary investor said, “We are raising prices. People are raising prices to us, and it’s being accepted. The costs are just up, up, up. Steel costs, you know, just every day they’re going up.”

Bill Ackman, billionaire hedge fund manager and CEO of Pershing Square Capital Management, counts hotels, restaurants, retailers, and real estate among his holdings. He tweeted: “The inflation that households are actually experiencing is raging and well in excess of reported government statistics.”

Is gold a good inflation hedge?

In 2021, gold lost some of its luster as an investment instrument and perceived hedge against inflation. One reason was that some central banks began to sell large amounts of gold for the first time since 2010. This was to offset the huge financial impact caused by the global pandemic.

Some top investment analysts warn that gold’s reputation as the best inflation hedge is not a certainty. Other precious metals—such as silver—might offer investors a better shelter from rising prices. They say investors would be better off investing in metals that also have a strong use in industry, reflecting a demand that will continue to grow regardless of where inflation is trending. Silver may therefore be a better hedge than gold in order to protect against hyperinflation.

Other limitations of holding gold as an inflation hedge

It does not yield anything

Unlike some stocks, bonds, and other securities, investors in physical gold do not earn dividends or interest.

It has additional costs.

Gold investors need to pay fees to buy and sell gold, safely store it, and to insure their investment.

Gold is volatile

While over the long haul the price of gold has gone up, there have been significant periods where the price has moved down or trended sideways. Investors may need to wait a long time before achieving profits. In this case, they will need to decide if the lost opportunity cost is worth holding onto gold for a potential future gain.

Gold is not as liquid as other assets

Gold is not like stocks that can be bought and sold in minutes through an online brokerage. If you need to sell your gold quickly, it may take you several days or longer to find a buyer, ship your gold to the buyer, and receive your money.

So, should you dump gold?

Despite gold’s limitations, many investors own the precious metal as a portion of their diversified stock portfolio. They view gold as real money compared to the fiat currency governments print. If a government devalues its nation’s currency and hyperinflation becomes a crisis, an ownership in gold represents a way to preserve wealth. In effect, they believe it can help protect against hyperinflation.

According to the World Gold Council, “Gold protects purchasing power in the long run against more than just the price of goods and services. In tracking money supply, gold can help investors protect against potentially excessive asset price inflation and currency debasement.”

Rather than holding bullion coins or other physical gold, many investors opt for more convenient forms of ownership. This includes buying gold exchange traded funds (ETFs), shares in gold mining companies, and Perth Mint Gold Certificates.

Is Bitcoin a good inflation hedge?

Glen Goodman, author of the best-selling book The Crypto Trader, discusses the new narrative of Bitcoin as a hedge against inflation. Both gold and Bitcoin share a common characteristic that make them good inflation hedges—neither can be produced in huge quantities by a government or central bank.

The supply of both is restricted and this gives them an intrinsic value that fiat money does not have. Some believe Bitcoin is an even better hedge than gold because the algorithm guarantees the creation of a finite number of new Bitcoins each year.

What the rich are saying

But not everyone finds this argument convincing. While billionaires Elon Musk and Mark Cuban like cryptocurrency for various reasons, neither claim it’s an inflation hedge.

Musk advises against “betting the farm on crypto.” In fact, he doesn’t believe true value is found in any form of money, digital or fiat. Instead, he believes value exists in providing services and building products for our fellow human beings.

Cuban is blunt about his skepticism of Bitcoin as an inflation hedge. Despite being generally bullish on digital currencies, he states that Bitcoin is not now and never will be a hedge against inflation. According to Cuban, saying that either gold or Bitcoin is an inflation hedge is just a marketing slogan.

How to protect against hyperinflation

There are other inflation hedge strategies you might want to consider. Here are a few:

Commodities

Commodities—such as investments in grains, beef, oil, natural gas—have the benefit of being inflation-resistant because commodities are always in demand. Investors can often get good returns even during periods of high inflation. Many investors own commodities as a part of a broader portfolio of investments.

Stocks

The stock market, despite its volatility, has an overall history of providing the highest potential returns. In the long haul, no other investment performs better. Stock market investment offers significant advantages in terms of liquidity and ease of purchase.

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are companies that manage or own properties like apartment complexes, shopping malls, office buildings, and warehouses. As inflation increases, REIT investments tend to perform well because rental income and property prices also increase. An added benefit is that REITs can pay hefty dividends. By law, the trusts must pay at least 90% of their profits as shareholder dividends.

Conclusion

There is no universal consensus on whether Bitcoin or gold is the better investment to protect against hyperinflation. Often the best solution is to keep it simple and to stick to what is tried and tested. If you do feel a alternative approach is warranted then maybe allocate a small part of your investment (up to 5% maximum). The best investment strategies consist of diversification and balancing risk.

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Elizabeth Blessing

Elizabeth has been writing about personal finance and investments since 2014. She is a writer and editor for the financial information website, Investopedia. Elizabeth has written about growth investing and income stocks for the award-winning newsletter, "The Complete Investor." She covered high-yield stocks for the newsletters "Leeb Income Millionaire" and "Leeb Income Performance." Her monthly spotlight columns covered a number of investing trends and strategies, including gold investing, dividend stocks, exchange traded funds (ETFs), real estate investment trusts (REITs), mergers and acquisitions, and the latest in investor education. She’s written for many online investment publications, including Investing Daily, Wealthtender, Weiss Research, and Eagle Financial.

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