What is the future of gold?
With MicroStrategy’s Michael Saylor saying Bitcoin will completely replace gold – because it’s better than gold – and in light of JPMorgan’s now widely cited observation that money is flowing out of gold and into Bitcoin, gold’s future might seem bleak.
However, rather than completely replacing gold it is much more likely that as Bitcoin evolves Bitcoin will be Bitcoin – not gold – and will co-exist with gold.
Bitcoin is not gold
If we think about how Bitcoin was described by Satoshi Nakamoto, it is much more in terms of a currency and store of value, rather than a safe haven asset in the traditional sense. This asset gained popularity over the past few years, with references to Bitcoin as ‘digital gold’, but while Bitcoin does share important characteristics with gold in terms of divisibility, fungibility and all the usual suspects, it does not function in the same way in terms of price.
Bitcoin is not a safe haven asset like gold. The case here is not that whenever the economy goes down, people buy Bitcoin. Such inverse correlation for Bitcoin does not exist or at least has not been established conclusively.
Rather, Bitcoin is an uncorrelated asset. It follows its own trajectory and while specific economic conditions might heighten attention and raise demand for Bitcoin, when we zoom out and observe the price, we are seeing a strong and decisive uptrend, irrespective of those same conditions.
Bitcoin is not a stock that investors might hold for a while to make a profit. Rather, in essence, Bitcoin is a new form of money. It is better than money even – yes, it’s volatile, but how is money that loses value over the years any good?
Have a look at the table below, for example, and see how even the strongest of fiat currencies have lost value against gold since the 1900s.
- Bitcoin is better than the money we are used to, as it is scarce. In fact, it is perfectly scarce. There can only be 21 million Bitcoin and there is no way to issue more.
- It is global – not pegged to any other currency, Bitcoin holds its own value.
- Bitcoin can be transacted more easily and without the need for intermediaries.
CBDCs are not Bitcoin
This is not to say that Bitcoin will completely replace the US dollar and other major fiat currencies. Rather, it means that it is highly likely that Bitcoin will become a preferred currency to hold one’s savings in, or in the future to price stocks and other assets.
The fact that it’s becoming easier to use Bitcoin to pay for products and services, whether that’s on PayPal or at a Tesla dealer, doesn’t necessarily mean that investors in Bitcoin will gladly spend their Bitcoin. It is much more likely that fiat will remain the preferred payment currency.
However, this will probably take on the form of Central Bank Digital Currencies (CBDC’s). These central bank issued, fiat pegged stablecoins offer the same technical benefits as cryptocurrencies. Yet, they are not decentralized, do not offer scarcity, they derive their value from monetary jurisdictions and are therefore ‘asymmetrically global’ at best – for example, the US dollar might be used globally, but it is ultimately controlled by the Federal Reserve.
All this tells us is that Bitcoin is best seen as a long term store of value that has superior capabilities. Rather than keeping cash in a bank account, savings can now be held in secure, privately held wallets and treated as a family treasure – without the need for someone else to safeguard it.
In an instant, and for little cost, this store of value can be transacted across borders, divided, sold, or placed in a savings account where it accrues interest.
Towards a sound form of money
All this does indeed appear to eat away at the market for gold, but let’s not take it too far. Just because Bitcoin might disrupt and replace real estate as a form of property, people will not stop buying houses. At least, not until we transition into some type of society that is truly and completely nomadic and perhaps space-bound, in which case real estate (and houses) on earth may not be valued in the same way anymore.
In the same way, gold is still a highly prized and respectable asset. Indeed, it seems implausible that kings, queens, dignitaries and central banks will one day find their gold holdings to be worthless. However, let’s also not take things for granted.
Gold may well at some point become simply another precious metal that people value as a resource or for aesthetic purposes, but over the course of decades it is possible that gold loses some of its appeal as a hedging instrument. It’s worth noting here that new generations generally prefer Bitcoin over gold, albeit still in terms of a ‘safe haven asset’.
That said, gold is better than cash and unlike fiat, it is a sound form of money.
Gold has indeed been used for thousands of years and not necessarily as a ‘hedge’. Rather, it was regarded as real money that could be trusted and would retain its value over time.
Even if Bitcoin does indeed become an extremely important global market asset, and the preferred store of value for the rich and aspiring alike, and even if CBCDs become the payment currencies of choice, it does not mean they will replace gold.
Rather, along with silver, platinum and other precious metals, we might actually see a return to something akin to the gold standard, with CBCDs linking fiat currencies back to physical assets – this could potentially be bearish for Bitcoin, although we cannot ignore the trust factor in such a scenario.
Another outcome could be that while Bitcoin may be preferred for storing value, tokenized gold and other tokenized assets, may be preferred for global payments. Such digital metal currencies would arguably be less contentious as say a state-issued USD, CNY or PHP-pegged CBDC.
While Bitcoin does indeed take market share away from gold, if only in light of how new generations perceive digital assets as compared to gold, this does not mean gold has no future. Bitcoin and gold are likely to be held in conjunction to serve different purposes.