Almost 16 months since the global coronavirus pandemic was first declared, there’s now yet another thing for institutional investors to worry about — the possibility of inflation.

Lately, much has been made of the potential for inflation to emerge given sustained low interest rates and the large deficits that many governments have incurred due to fighting the effects of the  coronavirus crisis. Investors are concerned about the potential impact on their investments should inflation spike as some are suggesting.

Read: Decline in bond yields signals market observers to be on ‘inflation watch’: report

Gold has often been mentioned as a hedge against inflation in addition to being a store of value. Some are suggesting that Bitcoin and other cryptocurrencies may be an alternative to gold. Not surprisingly, many investors are unsure how to proceed, as well as how to compare gold and cryptocurrencies when evaluating the role one, or both, could play if inflation does indeed happen post-pandemic.

As of Dec. 31, 2020, the amount of gold above ground is more than 200,000 tonnes and worth more than US$12.2 trillion, according to a recent report by the World Gold Council. The current supply is a mix of mined (72 per cent) and recycled (28 per cent) gold. Gold has increased in supply by 1.4 per cent per year over the past 20 years, which has helped support its price, added the report by the global association for the gold industry.

Gold has long functioned as a store of value for governments and individuals, gaining the greatest interest at times of perceived, or real, systemic risk. An example is the current instability wrought by the ongoing pandemic. Central banks often hold gold as part of their foreign reserves and, not surprisingly, purchases of gold increased during the pandemic, particularly in Asia. Gold is used in industry for such uses as electronics, medicine, dentistry and aerospace. It’s also used in jewelry, either to be worn or as a display of wealth. Finally, gold can be found in many investor’s portfolios, sometimes held as bars or coins and, more recently, held through exchange-traded funds.

Read: Investors expect gold prices to remain bullish: survey

In terms of its demand, about 72 per cent comes from emerging markets, with China and India representing 50 per cent of overall demand and 28 per cent from developed markets, according to the gold council report. Central banks account for about 17 per cent of holdings, jewelry 46 per cent, bars and coins 20 per cent, ETFs two per cent and the remainder, 15 per cent, unknown.

The average annual return for gold from 1971 to 2020 was 11 per cent per year, which has outpaced inflation, as measured by the U.S. consumer price index, noted the gold council. The index in the U.S. over this period was 3.9 per cent, whereas the global consumer price index was 9.3 per cent. In times when inflation exceeded three per cent in a year, gold increased in value by 15 per cent per year on average, said the report. It also found gold has performed best in the period immediately after a large market sell off, with outsized returns being achieved after the dot-com bubble and after global financial crises.

Some proponents of cryptocurrencies suggest it could become ‘digital gold.’ Bitcoin, one of the most well-known cryptocurrencies, is considered by some to be an asset with monetary rather than intrinsic value. Other examples of assets with monetary value are precious metals, gems and artwork. Some suggest that durability, scarcity and privacy all contribute to these items holding monetary value, which itself is the product of a collective belief. Given that cryptocurrencies are relatively immature, proponents of them suggest the price volatility is part of establishing a market value.

Read: Back to basics on cryptocurrency

While cryptocurrencies may become a store of value, it’s hard to argue this at the present time. The value of Bitcoin has been three-times more volatile than the S&P 500 or Nasdaq for the years 2019 and 2020 and 4.5-times more volatile than gold, according to a report by the Perth Mint in Australia. The price volatility of gold over this period was 2.5 per cent, whereas the volatility of Bitcoin’s price was 9.9 per cent, noted the report. And the value at risk per $10,000 for gold for the same time period is $291, compared to $1,382 for Bitcoin. While gold tends to show a negative correlation to equities during significant stock market corrections, Bitcoin has been equally likely to rally or decline during similar periods, added the report.

In December 2020, Bitcoin had a market capitalization of about $300 billion, far less than the value of gold holdings, noted the Perth Mint. So not only is the market for cryptocurrencies much smaller, it’s far less liquid. In 2020, the report found, the daily turnover for gold was 90-times larger than the daily turnover for Bitcoin. At present, cryptocurrencies aren’t widely regulated and can be subject to fraud and hacking. This is being mitigated somewhat with increased regulation and the participation of institutional investors, brokerages and custodians in the cryptocurrency market.

At present, it’s clear that gold provides greater inflation protection and functions as a more stable store of value than cryptocurrencies. However, we live in a fast evolving world and this definitely bears watching over the next few years.

Read: Are institutional investors moving into cryptocurrency?