For years, I have implored cryptocurrency advocates to take a step back and reflect on one key aspect of the market — namely, cryptocurrencies are quoted in dollars.
When you brag about mind-boggling gains you made speculating in Bitcoin, you talk about how you bought it at (I don’t know) $550, and sold it at $15,000. Note that the conversation only makes sense in the context of dollars. Also note that the dollar is so ubiquitous that one doesn’t even notice its presence in the discussion. It’s a given. You have to have it as a reference point. Otherwise, the conversation is gibberish.
Bitcoin rose near $11,000 recently alongside the surge in gold. That is not a coincidence. Although I would not personally equate the two, many observers are inclined to do just that on the excuse that, like gold, Bitcoin is a hedge against currency debasement and monetary/fiscal largesse.
I should emphasize (again), that while I’m no fan of holding outsized gold positions given the lack of an internal rate of return and the fact that its utility outside of serving as a portfolio hedge is, in my mind, quite limited, I would never malign gold in the terms I’ve often used to discuss Bitcoin.
According to JPMorgan, flows into Bitcoin over the last six months are elevated, a testament to investors’ fascination with “secular themes like… alternative reserve assets”.
Amid gold’s historic surge (which on Tuesday appeared to hit some turbulence at high altitude), I want to take the opportunity to point out that the yellow metal is vulnerable to the same criticism I’ve leveled against cryptocurrencies.
It’s true that you’ll find plenty of charts (often emanating from some of the seedier corners of the online marketplace for financial commentary) which price other assets in gold. But, at the end of the day, it too is priced in dollars.
On Tuesday, Rabobank’s Michael Every drove this point home quite effectively. “There is so much obsession with gold at the moment — there seems no stopping it”, he wrote, in his latest daily missive. (As an aside, Every’s notes have made their way to the very top of my morning reading list, no small feat — they pair well with espresso and a predawn cigar on the back deck.)
“Will we get to $3,000, as one major bank is claiming, or will we go to $5,000, as a razor-sharp friend suggested to me yesterday?”, Every went on to wonder. Then, he delivered a reality check, as follows:
Either is possible given the current trend. And, if you buy gold, technically that is going to make you money. And yet that money is still going to be priced in US DOLLARS — and that gives the whole game away. Gold fans can dream of the distant past when gold was the centre of the global monetary system; but they can keep dreaming if they think those days are ever going to return. Gold may be an appreciating asset, but all the evidence suggests that it won’t be one that is of any direct relevance to day-to-day life, finance, and business. Your currency won’t be tied to it. You won’t get paid in it. You won’t spend in it or save in it (other than to the switch back to US Dollars). You won’t be doing deals in it or importing in it.
And there it is. A wonderfully concise version of a snarky series of tweets I delivered last week.
There’s something self-evidently absurd about designating something as an alternative to the dollar, when that thing is by necessity priced in dollars. Gold and Bitcoin can be priced in other currencies, of course, but outside of that context, the whole “game” (as Every puts it) ceases to make much sense.
Obviously, it makes more sense with gold (compared to cryptocurrencies), given gold’s reputation as a store of value and a medium of exchange which has endured over the centuries. As one reader pointed out last week, countless people have fought and died for gold.
But even there, it’s difficult to discern what, exactly, it is that you’re saying when you assert that a given quantity of gold is, for example, worth two beaver pelts. Why? Note that referencing some previous exchange doesn’t really work. That is, you might say “Well because I exchanged a larger quantity of gold last week for a musket and a canoe, and clearly a musket and a canoe are together worth more than a pair of beaver pelts”. But that just begs the question. It’s an infinite regress.
With Bitcoin, such conversations make no sense whatsoever. It simply doesn’t work the other way around. You would never quote dollars in Bitcoin. That is a nonsense proposition.
There is an economic dictum that bad money drives out good, because good money is either used or hoarded and the bad money is just a medium of exchange. Drug deals were priced in Tide detergent because cash money was too valuable for vulnerable transactions. In smaller economies like prisons, trades are not conducted in packs of cigarettes because they get smoked or even in flavored potato chips because they get eaten, but something of inherently less utility like plain potato chips or packs of ramen. Gold and, ugh – so far – bitcoin, are too valuable to be useful as currencies. It would be stupid to price pizza in micrograms of gold or so many Satoshis. As appreciating commodities, people will acquire them as assets and actually use the otherwise useless bits of green paper.
I don’t really understand the point that you are trying to make here. Gold can go up in dollars, isn’t that all an investor should care about?
why doesn’t referencing an exchange between gold and a canoe work? Everything has its price set by the market, though there is fluctuation, and if you send money with coinbase dollars are indeed quoted in btc. The real mystery is how infinitely printed currencies have any exchange value, even Weimar and ZImbabwe didn’t advertise this policy, though I guess they implemented it better.
So what.
I bought one share of Amazon in 2000. The share sits in my brokerage account. I’ve paid an annual fee for the last 23 years to maintain my account with the one share. The Amazon shares are priced in USD. I can’t do anything with the share. It just sits there. Amazon is maybe the best business ever invented. But, I’m still paying my annual account fee on bokerage account every year. Maybe I got some dividend a year ago on my share. It wasn’t something I cared about or was looking for. I didn’t buy it for future cash flow anyways. I was never fascinated by my share.
If I die, where does my share go? I don’t have any beneficiares. The share will disappear as far as I’m concerned. Someone will get it.
I keep the one share because it’s valuable in USD. It has appreciated greatly against USD, which has continued to lose value since 2000. I can sell the one share. If I did sell, then I hae a bunch of depreciating USD. I’ll keep the one share of Amazon. If the $USD goes to 70, I’ll maybe sell it and have tons of USD I can use to buy food and pay rent. Because it’s denominated in USD, it’ll be easy for me to sell.
Everything requires a context or reference point to have a legitimate value. Remember the value of everything is only what a sufficiently large number of buyers and sellers say it is. Peter Pan taught us that….
I think the point H is trying to make is that the USD remains the global numeraire. Many commentators have forecast it’s doom but it remains unrivaled as the international benchmark. Gold is measured against the USD, Oil is priced in USD, pretty much every currency or asset is measured vs USD. Its decline has been predicted since the 70’s if not before and yet it remains THE benchmark, not gold, not BTC, or anything else.
Whilst is has taken some shots along the way, it can genuinely lay claim to the quote “reports of my death are greatly exaggerated”
I can certainly see a potential play where Russia and China get cute and partially back their currencies with gold in an attempt to kick the USD in the balls and in the short term it might do so, but the US holds massive gold reserves as well, far beyond even their combined reserves, so that’s not really a threat. They could maybe get up to #2/3 vs the USD. Nobody can offer the service the US does which keeps the USD firmly in #1.
No argument at all that dollars will the King for the mid to long term, the question is more, what exactly will dollars be worth in regards to other assets. I would say Land or Fine Art is not terribly different from Bitcoin or Gold in the regard that they do not really offer any return other than speculative increases however historically land, fine art and gold have served that function well as currencies devalue. I would say crypto writ large has some potential to serve as a new form or land/fine art/gold. Will it be bitcoin that survives or any crypto? I really do not know but I am willing to speculate 1-2% of my portfolio on it and rebalance to take gains when applicable.
USD will be #1 until such time that the US Military fails to offer global security to international trade or at least to most relevant friendly regions.
There is definitely something paradoxical about “investing” in gold and bitcoin. If you truly think gold is the stable source of value, then why would you cheer when the USD price rises? Your wealth hasn’t changed, it just takes other people more devalued pieces of green paper to buy it.
Same with bitcoin. If you think the value of bitcoin is that it will serve as a major currency one day, then you should want it to be stable so that people will be willing to quote the price of their goods in BTC (and not just the fluctuating minute-by-minute USD equivalent), which is what it will take for it to be a currency.
I am a gold standard advocate because of the abuse of power that fiat currencies have enabled. I own gold but I never know whether to be happy or not when the USD price goes up. It’s like taking out an insurance policy on someone else’s life. A successful outcome will probably be a grim one.
I am not a gold standard advocate, but this is the kind of thinking/comment that I like to see in terms of analyzing the myriad paradoxes inherent in markets. Good for this person.
Agreed, except it’s my life I am buying insurance for. If my dollar savings meager as they are get devalued I end up even more impoverished. I invest in things like bitcoin and gold because I suspect the odds my green tickets will be devalued are about as good as my paycheck never growing in comparison to cost of living and in fact falling as has been the case my entire adult life. I buy these things because I have little other option. I could buy equities but I have even less faith in them holding value at present unless the FED steps up as a buyer of last resort. What am I to do in hopes I can manage to maintain sufficient wealth to weather storms like joblessness or health issues? I do not even see the hope of retirement at this point.
I agree with your thoughts, but the economic pie is growing while gold’s share of the pie roughly stays the same. Gold buys more goods and services per unit as the economy grows.
To me gold is simply a way to preserve spending power when the dollar or your fiat of choice is clearly in a devaluation path, the hedge aspect is certainly a plus in the current pandemic-tradewar-trumpian reality. As to Bitcoin and crypto, every point you make is accurate, but I will say this in their defense, cryptocurrencies dollar value is based on good old price discovery, supply and demand, no need to determine whether Fed liquidity, QE, YCC or some other financial artifact is at play, I like that, central banks (as of now) can’t mess with your long or short thesis on BTC, even if their actions may influence your view on what dollar value it may have tomorrow.
Well said mate! And as an aside this is a great discussion in the comment section H. Very constructive conversation well done gents
I too use gold as a form of insurance. By investing in gold (and silver) mining companies and equities I hope to try to at least maintain the value of my portfolio in times like we’re in now and have it grow when things return to some semblance of normalcy. The trick of course is picking good companies.
At this point I’m treating gold as a short term momentum trade, that has minimal risk.