Cryptocurrencies Are No Substitute for Gold

27 Jan 2018

by Peter Schiff, SchiffGold:

The World Gold Council has weighed in on the cryptocurrency vs. gold debate. Unsurprisingly, the organization came down on the side of the yellow metal. But despite whatever bias you might perceive, the WGC report is certainly worth considering.

The World Gold Council is not necessarily negative on Bitcoin, saying “cryptocurrencies may become an established part of the financial system.” But the WGC does make a strong case that cryptos will not replace gold. Its analysts argue that while they have some similarities, gold and cryptocurrencies are very different. According to the report, these fundamental differences “underpin gold’s role as a mainstream financial assetthat will likely continue to resonate in today’s digital world.”

The WGC pinpoints five key differences. When compared to cryptocurrencies, gold —

  • is less volatile
  • has a more liquid market
  • trades in an established regulatory framework
  • has a well-understood role in an investment portfolio
  • has little overlap with cryptocurrencies on many sources of demand and supply.

The report also addressed the belief that that meteoric rise in the price of Bitcoin last year hurt gold, saying, “there isn’t any quantifiable evidence that gold holdings are directly suffering from competition from cryptocurrencies.” It points to a number of other factors the impacted gold demand in 2017.

The weakness in physical demand in 2017 – for example, the paltry sales of US Eagles – is largely explained by the steady march higher of the S&P 500. Other established gold markets – such as China – saw healthy levels of demand. Overall, the level of the gold price in 2017 appears to be consistent with drivers of the past few years and is showing no signs of suffering from crypto-competition.”

The WGC points out that in some ways, gold and cryptos are complementary assets. It highlighted the similarity in their supply dynamics.

The stock of bitcoins, for example, increases in number at a rate of approximately 4% per annum, and is engineered to slowly decline to zero growth around the year 2140. While gold can be mined without a date limit, its production rate has been quite small and steady. Approximately 3,200 tons of gold have been mined on average, each year, adding about 1.7% to the total stock of gold ever mined. Bitcoin’s future diminishing growth rate and ultimate finite quantity are clearly attractive attributes, as is gold’s scarcity and marginal annual growth.”

The World Gold Council report also noted the importance of the blockchain technology that underlies Bitcoin and other cryptos, calling it “genuinely innovative.” According to the report, “the blockchain could have wide-ranging applications across financial services and beyond.” As we reported earlier this week, the blockchain may become an important part of the gold market in the future.

But ultimately, the WGC concludes Bitcoin is no substitute for gold.

Gold is a tried and tested effective investment tool in portfolios. It has been a source of returns rivaling that of the stock market over various time horizons; it has performed well during periods of inflation; it has been a highly liquid, established market; and it has acted as an important portfolio diversifier, exemplifying negative correlation to the market during downturns. Cryptocurrency’s performance has, until recently, been remarkable, but its purpose as an investment seems quite different from gold …  The crypto-market is young, and liquidity is scarce. Its price behavior at this point, while still attractive to many investors, seems to be driven by high return expectations.”

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