3 Traditional Gold Price Drivers & How Crypto Disrupts Them
Some claim Crypto is a replacement for Gold as an investment and while there may be some truth to this claim, it is worth having a deeper look at how and why this might be true. I’ve studied Gold and its traditional price drivers a bit over the last few years before I got involved with Crypto. I can confirm that for me at least in 2017 my Gold purchases have slowed and this year many of those Gold purchases were replaced by Crypto purchases. Am I the only one who’s been buying Crypto instead of Gold? Is it a trend that is a sign of things to come?
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Gold is quite unique and unlike most other commodities or assets I have studied. In my experience there are 3 diverse and different uses for Gold. The demand for each use has become what I would consider the traditional price drivers for the yellow metal. Here I will take a brief look at each of them and compare Gold to Crypto to see how they might differ and whether Crypto might be pulling demand away from Gold.
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Gold is as old as time itself and throughout human history (even as far back as the ancient Egyptians) Gold has been cherished not just for its beauty but also it’s durability and it’s position as the ultimate store of wealth. It doesn’t erode or decay and there has always been demand for Gold. While government issued fiat currencies can come and go by the hundreds, Gold always endures. Whenever there is political uncertainty or war there has been Safe Haven demand for Gold to bid the prices up. Today we see it whenever the North Korean flashpoint flares up. We saw it with Trump being elected. The reason is that when there is fear and uncertainty then it makes more sense to hold Gold than government issued fiat currency. Especially when there is war, if you are on the losing side and have all your wealth in fiat….well there is a good chance your wealth will be gone if your government is gone. Even if you win the war, your country may need a massive rebuilding effort and chances are the government will print up money to pay for it and thus dilute your wealth. If you need to flee the country in fear of your life with not much more than the shirt on your back….well you can stick some Gold coins in your pocket and know that wherever you might end up they will end up being worth something and those Gold coins can help you secure a new life.
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Crypto Disruption – When it comes to “Capital Flight” like I described above then this is where Crypto beats Gold hands down. You could stick a hardware wallet in your pocket or even a piece of paper with your 12 word mnemonic phrase and Get Outta Dodge with your wealth intact. You could even memorise the phrase and have no fear of any border security strip search or theft on your way out. We are seeing a lot of Crypto demand coming from South Korea – Is that because they are early adopters of technology? Or are they preparing for the worst because they are in the firing line should the North Korean situation blow up? Or is it the Chinese, banned from trading Crypto in their own country popping up in a nearby neighbour? Maybe it’s all of the above, but Crypto still doesn’t have the stability and trust of Gold, so while there may be disruption here I don’t see Crypto replacing Gold as a Safe Haven Asset until it is more widely accepted and stable.
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Governments like to print money and inflate their fiat currencies. Most governments in the West will openly admit to having a 2-3% ”Inflation Target”. So from year to year you will nearly always get less for your dollar than you did the year before. Most mainstream investors will put their fiat currency into a traditional bank to earn interest and the unwritten rule here is that the interest on your money in the bank should be enough to stay ahead of inflation, but it is not always the case. In the USA we saw official interest rates at zero for a few years after the GFC and in some parts of Europe and Japan they actually have NEGATIVE interest rates. It’s tough to get your head around but basically you are paying the bank interest for the privilege of having them hold your money for you…sounds crazy right? Well it’s happening! The easiest way to get a handle on whether Gold has demand as an effective Inflation Hedge is to take the Nominal Interest Rate and then subtract Inflation. The result is known as the Real Interest Rate and if this number is negative then people buy Gold because even the interest rate is not enough to overcome inflation. A very large part of the developed world currently experiences Negative Real Interest Rates.
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Crypto Disruption – Anyone who has studied Bitcoin would know there is intended to be a fixed supply of 21 million Bitcoins. It was designed to be deflationary and that makes it the opposite of fiat currency thus theoretically an excellent hedge against fiat currency inflation in its own right. We see a lot of investors flooding into Crypto assets now (especially in places like Venezuela) because it offers them a legitimate alternative to inflationary fiat currencies, so this is an area where Crypto definitely has the potential to replace Gold as an Inflation Hedge. Of course, we still have volatility to deal with, but it doesn’t take a big imagination to see that once we get mainstream adoption of Crypto and some stability then Crypto will be an attractive alternative to Gold as an Inflation Hedge.
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Gold has a lot of special qualities. For a start, it is shiny and attractive so it is extensively used to make jewellery. It doesn’t matter what part of the world you’re from or what culture you live amongst, there is barely a woman alive who would not appreciate being given a nice piece of gold jewellery. It has traditionally been an excellent engagement or wedding present and as the metal itself is a store of value it has great utility in this regard for passing wealth through the family via heirlooms and inheritance. It is literally wealth that you can wear. Gold also is an excellent conductor of electricity and it does not tarnish so there are many industrial uses such as in the manufacture of electronics, dentistry, medical instruments and aerospace (to name just a few). It is also worth mentioning Silver here because while it also (to a lesser extent) has some appeal as a Safe Haven Asset and an Inflation Hedge it is also a commodity which has extensive industrial usage. When the world is at peace and governments are running their monetary policies responsibly (yes, I did almost choke writing that line because it’s NEVER happened), both Gold and Silver can fall back on commodity demand to provide some price support.
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Crypto Disruption – This is one area where Crypto can’t beat Gold. You can’t wear a Bitcoin or manufacture a computer with it. Try as you might to imagine it but Crypto does not have real world physical properties that would make it a consumable or physically usable commodity.
So where does this leave us? Don’t get me wrong I do love both Gold and Crypto so I like to hold both. While there are some similarities and perhaps competition between the two for some uses, they are still quite different and have strengths and weaknesses that are perhaps a bit complementary. I will even go one step further and suggest that with the current mania in the Crypto market in combination with the relative depression in the Gold market there is a strong case to make for Gold to be an excellent hedge against a crash in the Crypto market. Think of it in terms of a change in sentiment where Crypto may not be pulling Safe Haven and Inflation Hedge demand away from Gold. Surely a depression in the Crypto market would thus be bullish for Gold?
Sounds simple really, but it isn’t always so easy to go against the herd.
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https://goldstockbull.com
http://www.rmegold.com
https://www.pakistantoday.com.pk
http://www.abundance-and-happiness.com
http://www.marketoracle.co.uk
http://www.pixelonomics.com
https://www.confused.com
http://www.usfunds.com
https://bitcoinwisdom.com
https://www.ig.com
Very interesting article, I myself have started buying crypto instead of gold and silver however I do love the physical metals and still believe the metals will have their day . Cheers mike
Thanks. Everything is cyclical and if you use history as a guide you'd be confident that Gold and Silver will come back to life soon ;)
Thanks for your reply mate , cheers mike
Gold and crypto have their special use cases as you mentioned.
Most people havn't realized the impact of Negative Real Interest Rates to their savings. Because of enormous debt the possibility to rise interest rates by central banks is limited.
Venezuela is not everywhere (for now).
Does negative interest also apply to loans? (I doubt it, but I've always wondered)
Good question. With negative interest rates you should get paid for your loan (not in real life)
A loan can be profitable, like for me: rate 1.3% (- inflation, accually 2%) - 30% of interest rate back from tax.
There are a lot of people who have a vested interest in NOT educating people about how inflation and interest rates work. The sheeple still think that currency is wealth and keep their life savings in the bank earning pitiful interest. Some of them will learn the hard way that currencies and assets are very different things!
I like the way you think... I'm pretty sure we'll get along very well in the Future... You're a very sensible person... You might get a kick out of reading some of my
material... Read my Post titled "100 Times Face Value"
with this picture of COIN MAN on it... You'll be glad you did...
@pocketechange
That's true.
I think the bitcoin limited supply / protect against inflation is a myth. Bitcoin is a technology, the nature of technology is that it becomes obsolete as better technologies surpass it. Hashgraph is already a potential improvement over blockchain. Other improved technologies will emerge. We won't even get to 21M bitcoins in my opinion. It will be dead and buried long before then.
Also, while bitcoin might be limited to 21M coins, other cryptocurrencies are not limited. Bitcoin already has a lot of competition from established and ICO cryptocurrencies that are just as good as or better. (Good money drives out bad - so if a better crypto emerges, people will sell bitcoin to buy that).
The future is a gold or asset backed currency that can be tracked and managed by the blockchain. The gold provides true inflation protection while the blockchain provides the transactional capability (medium of exchange).
I need to have a good look at Hashgraph to see if it's a legit alternative to Blockchain, but even if you ignore Proof of Stake or Graphene technology there are better Proof of Work blockchains out there than Bitcoin.
I would love to see a decentralised Gold pegged Crypto. I wrote about STEEM GOLD a while back, but now that STEEM DOLLARS have blown the peg I'm not sure if that would work. The important thing is there should not need to be a centrally managed repository of gold, otherwise we have a big point of failure.
It'd be great to have the best of both worlds with Gold and Crypto effectively merged. It's good to have a dream :)
I also thought Bitcoin would not survive for reasons of technical advancement, but that was years ago.
First, I thought someone would simply copy the concept, replicate it and run with it. Well, I see that has occurred and technical improvements have occurred. Further, some of the initial promises of low transaction fees are out the window with Bitcoin. I don't see how Bitcoin maintains a stranglehold on the crypto universe.
From my memory, I previously thought that the size of the blockchain would be impossible to store because it was already huge (around 4GB at the time, I think). That sounds small today. BUT at that time, the industry was getting limited increase storage space and memory due to rare-earth metals limited out of China. So, basically, at the time we couldn't get new big hard drives or memory sticks and Bitcoin looked like it would need this huge amount of space.
Finally, I thought that increase computing power would eventually lead to manipulation by sheer processing power. And this has also not occurred. I think they continue to increase the complexity of the algorithms to restrict this manipulation idea.
I agree that a crypto currency based on the best technology and backed by precious metals is the best solution for the future.
The concept of buying a cryptocurrency as an investment is similar to buying hundreds of the latest model iPhones and hoping they will go up in value. Investing in a pure technology solution that does not have the capability to evolve is like throwing your money away. Technology companies that can innovate and continually produce new products is a good potential investment. Investing in the actual products of those companies is not a good investment.
If you want to invest in the blockchain, wait for the companies that start to innovate and come up with novel and useful applications of blockchain solutions that they can somehow patent and profit from. If you want to protect from inflation, just buy gold.
When I first looked at Bitcoin in 2015 I saw a lot of issues too. But a lot of them are being overcome by newer coins. It is great to see such rapid innovation.
Even mainstream, old school financial planner types hawking managed funds and ETFs will tell you diversification is the key. I bought gold in 2016. In 2017, I've bought some silver and cryptos. (Note: financial planners will never advise you that.)
I believe there is value in holding both precious metals and cryptos.
My super has been invested in cash since around 2015 when it looked like the war in Syria was going to blow out into a full on conflagration between the US and Russia. That threat has dissipated as Russia, Syria and Iran appear to have the upper hand over the US, Turkey and Gulf states, but the sharemarket still seems very overvalued. If there's a big sharemarket correction in 2018, I'll move from cash back into shares.
I'm not too worried about North Korea, as I believe the strategy of tension between North Korea and South Korea, Japan and China is just what the US wants in order to maintain its strong presence in the area. North Korea is worth much much more to the US alive than it is dead.
Happy investing in 2018. It's going to be a very interesting year.
Cheers. Diversification is key but also beyond that there are correlations and natural hedges of one investment against another. If you asked me 6 months ago I would have said Gold and Crypto were correlated but now I think Gold has become a hedge for Crypto because of the way sentiments have changed.
As for being in cash, I have a bit of that too. Syria has been a mess for some time but it seems to be near a resolution now. The US has blown it in the Middle East I reckon but that's a whole other post.
You are probably right about North Korea. They are a very useful bogeyman in Asia to justify US presence. Still, the market seems to respond to the sabre rattling so it was the best current example I could use for Safe Haven buying that would be fresh in peoples minds.
Hope you have a good 2018. Looking forward to seeing what's in store for us Gold and Crypto bugs ;)
Great article. I'm a long time stacker and newbie to crypto. This article hits the road running. There are a lot of opinions out there. Diversify is the best advice right now because none of us know the future.
Thanks. I'm still trying to find that balance between writing for the newbie or layman or getting right into the grits of a subject and assuming people know what I'm talking about.
Glad you got some value out of this one :)
excellent article, for myself I came to the conclusion that gold and digital gold (crypto-currencies, in particular bitcoin) have their advantages, as well as shortcomings, strengths and weaknesses.
Gold is more likely to protect your savings from falls in the market and many other troubles. At other times, the Crypto currency is able to increase your savings several times, give a good start, but at the same time, high volatility can cost you this money, and you can lose a lot.
each decides what to invest, but it is more expedient to always make diversification and spend your money wisely.
Thanks for the great article.
Thanks for the great comment. Crypto has been behaving generally as a wildly speculative asset so it is quite different to gold right now, but I hope things settle down and mature a bit soon.
You could be right that SK's are preparing for the worst. No one can tell what this crazy NK dictator is going to do next. Great article highlighting benefits of having cryptos and golds during government, economic collapse.
Nobody can know for sure. Glad you liked the article.
Great article! This is quality content and helps the platform grow :-)
Keep on contributing!
Thanks for the encouragement. I really appreciate it.
yes sir you are right,You are not only one who is investing in crypto-currrency,There are many people who are investing in crypto-currency and making a huge profit.I am also new in this crypto platform and hope to make a good profit.I have invested in trading exchange like bittrex.And yes investing in gold is not so profitable now a days.thanks to share your thoughts.great post.
How do you get 65 Votes and lots of Replies in 37 minutes...???
@pocketechange
I usually only write once or twice a week and focus on good content, so I've got 782 followers now who hopefully read my stuff. A few of them have added me to an auto-voter since I have earned a bit of a reputation for consistency and they can trust I won't post garbage for up votes.
Thank you for your Honesty... You've been very helpful... This is the first time anyone mentioned Auto-Voters to me... My Posts were never intended to look like a Commercial or some type of Product Advertisement ... I just like to open the eyes of those who have trouble seeing what's coming our way... I try all kinds of Eye-Catchers... I think I'm starting to get noticed now... Have a great day...
@pocketechange