What happens to gold and other asset classes when inflation is high?
Historically high inflation and increasing geopolitical risks: these were the key trends of the first half of 2022. Investors expected that under these conditions the price of gold would grow to compensate for the risks, but this didn't happen. Many were disappointed with gold's performance.
But what if we look at the events of H1 from another angle? Volatility is a key factor in an environment with high risks: the more intense the volatility, the more difficult it is for investors to keep calm. In this case, gold's traditional role as a hedge was reflected by its relatively low volatility.
While other commodities, especially oil and gas, appreciated more than gold, many indexes dumped. Both European stocks and tech stocks suffered from the Russia-Ukraine conflict, while interest rate hikes and the end of cheap credit further dampened the market's mood.
When analyzing volatility, one can say that on one hand, high volatility means a high potential risk of loss. But it also creates attractive opportunities to make a high profit.
The current market situation means that gold purchases are less risky than investing in most other assets, even though stock indexes seem to offer a higher level of diversification. Comparing historical 100-day volatility averages across 10 different asset types confirms this.
It's also interesting to compare the gold price dynamics with the world's biggest cryptocurrency, Bitcoin, which many have called digital gold. In the first half of 2022, BTC lost 44% of its values, severely underperforming compared to gold.
If you look at the volatility of these two assets, the good old gold looks much better. Bitcoin's 100-day volatility moving average is above 74% - four times higher than that of gold.
Of course, this also means that more people have become millionaires in the past few years thanks to Bitcoin than thanks to gold. But the point of investing in gold is not to get rich quick, but rather to invest in something that retains its purchasing value as fiat currencies become valueless.
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