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"Gold will shine in an inflationary environment", Peter Schiff says. Is gold truly the best inflation hedge?

14:28, 22 July 2022

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Peter Schiff
Peter Schiff speaking at the 2016 FreedomFest at Planet Hollywood in Las Vegas, Nevada. Photo: Gage Skidmore, Source: Flickr

Capital.com exclusively hosted a Youtube debate between Peter Schiff, CEO of Euro Pacific Capital and a big supporter of gold investing, and Tone Vays, a derivative trader and advocate of Bitcoin and the blockchain technology.

The two experts discussed about the factors affecting Bitcoin and gold, as well as the primary distinctions between these two asset classes.

According to Peter Schiff, Bitcoin will never be able to replace gold as a store of value and an inflation hedge because it is still a highly speculative token. Tone Vays, on the other hand, emphasised that Bitcoin is a brand-new asset that is still highly correlated with the stock market, but this correlation may fade in the future.

The two analysts also expressed what, according to their views, may be the best asset to hedge against inflation.

Peter Schiff asserted that real assets would safeguard the value of investments in an inflationary environment. Commodities, particularly precious metals like gold, and stocks with strong fundamentals and dividends will thrive in an inflationary environment as recent dollar gains are poised to reverse. Tone Vays, on the other hand, believed that the stock market (US 500) would be provide the best inflation hedge over the long term, as stocks incorporate the global technological progress. He also believes that the stock market's recovery will benefit Bitcoin due to the close correlation between the two assets.

You can watch the "Bitcoin vs Gold" debate in the video below.

Relationship between gold and inflation: What does the historical evidence say?

In a our recent article titled "Gold and inflation: Why Should Traders Prepare for Inflageddon?", we examined the historical relationship between gold and inflation to determine whether gold was truly an inflation hedge.

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Research by Capital.com's team of data analysts found that gold's annual returns have been remarkable when inflation rates in the United States exceeded the 10% mark, as the chart below shows. 

This historical evidence demonstrates that the gold has not been a reliable inflation hedge at any level of inflation; rather, it has been an asset to be held when inflation crossed a red line (above 10%), triggering fear of an out-of-control price spiral in the economy.

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a chart analysing US inflation rates and Gold's performance over timeHistorical analysis of gold's annual performances vs US inflation rates – Photo: Capital.com

Why is gold a store of value when inflation gets out of hand? 

In an environment characterized by high levels of inflation, gold would serve as insurance against the loss of confidence in fiat currencies such as the dollar, whose value is eroded due to the declining purchasing power. Gold is one of the rarest assets that have ever been found on Earth, and because of its limited quantity in nature, it cannot be diluted by the central-bank money printing. Thus, the economic value of gold acts as a buffer against the rising inflation in the economy.

In addition, gold is also a response to the fear that governments would use inflation as a tool to artificially reduce the soaring debts contracted during the pandemic, which caused the debt-to-GDP ratios in the developed world to skyrocket to record highs.

The current rate of inflation in the United States is 9.1% as of June 2022, the highest level in more than 40 years. The United States government debt-to-GDP ratio hit 137% at the end of 2021, the highest level ever recorded for the nation. 

If it becomes evident that Fed rate increases are ineffective at controlling inflation and that inflation would only serve as a political tool to deflate the enormous US debt, the dollar's value could plummet, which would increase the demand for gold as a store of value.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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