Evaluating Inflation Hedge Assets
Expected and unexpected results
On July 27 2020, I wrote a post titled, “Turning Point for Inflation Hedge Assets”. In this article, I highlighted why inflation hedge assets would surge due to the immense amount of monetary “stimulus” that was injected into the markets. I focused on Bitcoin, stocks, real estate, gold and other commodities. I think we can all agree that inflation actually hit. The “official” inflation statistics are a 5.7% increase from last year. I personally believe that the real inflation rate is closer to 15% but in reality nobody knows the true figures. All we know for sure is that inflation hit just like we predicted a year ago. I thought it would be interesting to evaluate the performance of these assets a year later.
The table above shows the 1yr rate of return for each inflation hedge asset. My main thesis last year was that all inflation hedge assets would appreciate and I strongly believed that Bitcoin would be the “fastest horse”. Even after a Bitcoin “crash”, Bitcoin is up ~300% from $10,800 per coin to $42,800 per coin. The highest Bitcoin price we saw was $64,500. My thesis was correct and Bitcoin was a great inflation hedge.
On July 27 2020, The S&P 500 index was at $3,270 which was already at an all time high back then. Today, we’re sitting at $4,431 and at another all time high. “Stocks only go up” is one of my favorite memes because in the current environment, it’s actually true.
Real estate is harder to track because there isn’t a true “index” but we can look at the median home prices today compared to those of a year ago. The median home price across the United States is $320,000. The median home price in August 2020 was $286,000. This is ~12% increase in home prices across the country. This is an absurd growth rate for house prices since traditional real estate appreciation rates are between 3-4% per year.
Finally we have commodities. Many commodities like lumber, steel and oil have gone up tremendously in the past year. However, silver and gold have not. Gold has historically been the main inflation hedge asset for literally thousands of years. I predicted that gold would also appreciate just like all other inflation hedge assets but this prediction was wrong. Very wrong.
Why is gold down so much? Easy. Less people want to buy gold haha. I’m only half joking here. The truth is that gold just isn’t an appealing commodity. Commodities like lumber, steel and oil are much more lucrative because they are input materials for many different industries. Gold not so much. Gold is perceived as valuable because of it “scarcity”. However, now it has to compete against Bitcoin which is truly scarce. I strongly believe that a lot of the capital that would’ve flowed into gold preferred to flow into Bitcoin. Bitcoin is capable of replacing many of gold’s properties and much, much more. I’m mostly noticing this among the “New Generation of Investors”. None of them own or want to own gold. Many opt to hold Bitcoin.
I’m looking forward to writing a deep dive comparison of Bitcoin vs Gold because it’s truly fascinating to see Bitcoin cannibalize another inflation hedge asset. There’s only 21 million Bitcoin. Buy more Bitcoin.