Cryptocurrencies have been touted as a hedge against rising inflation, but this commodity looks like a good alternative now. Here’s why.
Inflation is on the rise in the U.S.
Last Friday, the Commerce Department reported that the core price index jumped the most since July 1992 in April at 3.1%. That followed the Labor Department reporting a few weeks prior that the consumer price index jumped 4.2% in April as the U.S. economy kicked into high gear and energy prices moved higher.
“Transitory pandemic influences clearly contributed to the surprise but there’s residual firmness in core inflation that’s hard to ignore,” said Michael Gapen, chief U.S. economist at Barclays Plc, adding that beyond the pandemic reopening effect, “there was still some residual firmness that suggests risks around inflation in the near term are still skewed to the upside.”
Gold has been moving higher in recent months as inflation ticks up, but some investors have turned to cryptocurrencies as a hedge as a modern-day replacement for bullion.
But cryptos are notoriously volatile and that’s rarely been more apparent than in the last several weeks. Bitcoin, the world’s largest digital coin, hit a new all-time high above $65,000 mid-April but has since fallen precipitously. As of this writing, Bitcoin is trading at $38,910. Other cryptos, including Ethereum, XRP, and Dogecoin have seen similar moves.
This week, Goldman Sachs’ global head of commodities research, Jeff Currie, said copper looks like a good alternative to cryptos now for investors looking for a hedge.
“You look at the correlation between Bitcoin and copper, or a measure of risk appetite and Bitcoin, and we’ve got 10 years of trading history on Bitcoin – it is definitely a risk-on asset,” Currie said, also noting that both Bitcoin and copper are “risk-on” hedges, while gold is a “risk off” hedge.
“There is good inflation and there is bad inflation,” Currie said. “Good inflation is when demand pulls it, and that is what Bitcoin hedges. That is what copper hedges. Gold hedges bad inflation where supply is being curtailed, which is… focused on the shortages on chips, commodities and other types of input raw materials. And you would want to use gold as that hedge.”
Currie’s commodities research team said in a note out this week that commodities broadly remain the best inflation hedge against a potential downturn.
“Commodities are spot assets that do not depend on forward growth rates but on the level of demand relative to the level of supply today,” the team said in the note. “As a result, they hedge short-term unanticipated inflation, created when the level of aggregate demand is exceeding supply in the late stages of the business cycle.”