Gold has always been considered a haven for capital. The obvious proof is that governments keep a reserve of gold. They do so because in war the only money the losing side can use to buy things is gold, because in extreme situations government promises are worthless and only gold is acceptable for payments.
Many gold buyers hold a similar position. They do not trust any promise made in paper and are happy to swap their paper and electronic money for a metal that is hard to fake.
Gold can be faked or diluted as a depositor of gold in the U.S. found when they were repaid in gold bars made from coins rather than allowed to redeem the pure gold bars they deposited. Yet skullduggery aside, an ounce of gold is an ounce of gold, or at least people feel that to be true.
There are a lot of awkward things about gold that makes it difficult to invest in and many come down to security, but fear of loss isn’t the only thing that makes gold hoarding tricky. Although most of my readers might consider it a quality problem to have, gold is worth about $60 million a ton and as such is an awkward asset to store significant wealth in. If you are trying to protect yourself from a major disaster, gold is not going to do a great job for a billionaire.
An asset weighing even 100 pounds is awkward if its purpose is to protect the owner from war or such other predation. Ideally a “haven” asset has little weight because when the chips are down, as they say in India, wealth is only what you can carry.
This is, of course, an extreme point of view, but the fans of gold are quite often the holders of extreme views and extreme times do come and go. Inflation is one such extremity that gold buyers use the metal to protect against. There again, as occurred in the U.S. in the 1930s, owning gold is not protection if the ownership of gold is outlawed and the stock of individuals is rounded up on pain of imprisonment.
Yet gold is not only bought as a haven, many fearing bad times ahead buy it because they think it is going to rise in value. Gold is an extremely popular speculative asset and many people buy it in the most uncommercially expensive manner, such as via jewelry, to expose themselves to this possibility. Be that as it may, gold is an investment and most people who buy it are hoping that it will appreciate. Few buy gold expecting it to fall in value.
Gold, however, has stubbornly failed to go up hugely whatever the global economy does. It has not lived up to the expectations of many of its advocates of rising many multiples; the best it seems to manage is to jump a hundred dollars or two if something nasty kicks off somewhere on the globe.
Now, to make matters worse, bitcoin and some sister cryptocurrencies have been invented and they dramatically encroach on key use cases of gold, like flight capital and safe haven investment.
This actually is not a negative for gold because if more people see the benefit of investing in haven assets by bitcoin they will also be attracted to alternatives assets that do the same. As the saying goes, what’s good for Levi’s is good for jeans.
However, there is a simple reason why safe haven investors have more upside when they invest in bitcoin than when they invest in gold and that is issuance.
Every year there is another 3,300 tons of gold produced–lets call it $200 billion of new gold that must be absorbed every year by buyers. Recycling of gold matches consumption, so the new mined gold is extra. It’s a good job that there are 8 billion people in the world and most love gold because it only takes about $20 a head per year to hoover up that supply. We can see that in the price. There is no apparent downward trend in the price of gold as a never-ending new supply is injected into the market. The global economy laps it up.
Let’s look at bitcoin. Every year at, let’s say $10,000 a coin, there is $6.5 billion dollars of new supply that needs to be hoovered up by new demand to maintain its prices. The is a tiny fraction of the issuance of new gold. What is more, next year that issuance will halve.
So the dynamic is, both $200 billion and $6.5 billion is not a vast amount of money to be absorbed by the global economy, clearly bitcoin will go up a lot further and faster than gold will if the demand for haven assets were to suddenly spike. Even without any change in the dynamic, while gold issuance by mining will likely increase a little next year, bitcoin’s will halve.
As such, on this alone the relative upside for bitcoin is dramatically higher with the creation of coins halving every four years or so. This means the price of bitcoin should react like the price of gold would if half the mines in the world were closed every four years and that after 12 years gold output would slump nearly 90%.
From an investment perspective you simply have to decide whether bitcoin is financial hallucination doomed to fail or a new asset class destined to be part of the investment landscape. If you consider the latter a strong possibility then the prospects are hard to ignore. As I’m in the latter camp I continue to acquire.