The world’s central banks have eased monetary policy dramatically this year to support the world economy through the pandemic. They argue, and many agree, that they’ve saved millions of jobs and untold amounts of capital in so doing.
The side-effects of that policy – in the form of asset price bubbles – are becoming increasingly clear.
In the mainstream investing universe, it was gold that grabbed most of the headlines during the first part of the pandemic with its record run up to $2,089.20 dollars a troy ounce. In a world where the equities were collapsing and oil prices even dipped below zero, gold’s 32% rally from the start of the year seemed worth the superlatives.
However, that rally is now being emphatically put in the shade by a different ‘alternative asset’: Bitcoin.
For half a century, gold has been the haven that particularly retail investors have sought out at times when they were afraid of currency debasement by the world’s governments and central banks.
That was so when the dollar collapsed along with the whole Bretton Woods system in the early 1970s, when the devaluation of fiat currencies was evident in soaring rates of inflation. But it was also true in the years after the 2008 financial crisis, when consumer prices were stagnant or flirted with deflation, and the only inflation in sight was in the price of financial assets such as stocks and bonds.
In both periods, central bank balance sheets expanded quickly, and this seems to be the common factor again. From the end of 2019, the Federal Reserve’s balance sheet has expanded by $3 trillion to $7.17 trillion, while the European Central Bank’s has expanded by almost as much, from 4.67 trillion euros to 6.98 trillion.
