The threat of an imminent European war, however, has not prompted investors to pile into digital currencies, which have often been touted as the next generation’s disaster hedge.
In contrast, the price of bitcoin has been flat so far this month [bitcoin is presently trading at just under $US39,000]. What’s more, the bitcoin price – which climbed as high as $US45,855 just under a fortnight ago – has declined despite the growing geopolitical tensions.
Of course, geopolitical tensions aren’t solely responsible for the rise in the precious metal. The gold price is also finding support from stronger physical demand.
China’s gold consumption rose by more than a third last year, as the country’s economy recovered from the coronavirus pandemic, and as Beijing gave domestic and international banks permission to import large amounts of gold.
Consumption in the world’s largest gold consumer jumped 36.5 per cent in 2021 compared with the previous year. It was also up by almost 12 per cent from 2019, before the pandemic struck.
And central banks’ interest in gold is also picking up, with Turkey adding 1.6 tonnes to its holdings last month, while Poland has signalled that it could add 100 tonnes this year.
Meanwhile, El Salvador’s failed experiment with bitcoin is likely to discourage other developing countries from using digital currencies to diversify their foreign currency reserves away from the US dollar.
Last September, El Salvador became the first nation in the world to make bitcoin legal tender, which meant that it could be used to be used to buy goods, send remittances and even pay taxes.
But the decision that is estimated to have cost the country tens of millions of dollars, due to the steep drop in the bitcoin price.
Meanwhile, discussions International Monetary Fund, from which El Salvador is seeking more than $US1 billion in financing, have stalled due to concerns that the use of bitcoin is reducing financial transparency.
The IMF has urged El Salvador to drop bitcoin as legal tender, and has expressed concern over its plan to issue bonds linked to the digital currency.
