2020 was a triumphant year for gold bulls, both of the traditional and digital variety.
With central banks hell-bent to ensure liquidity flowed like so much Hendrick’s at any bar top I once perched, the debasement narrative ran rampant.
Deeply negative real rates in the US eliminated the opportunity cost of gold (the yellow kind), and for those who actually believe central banks will, in fact, be successful in engineering inflation, the Weimar hedge was back en vogue.
As the curtain closed on a year defined by existential crises of all kinds, gold boasted its best return in a decade (figure above).
Bullion’s near 25% gain was the best since 2010. I’d remind folks that at the end of the day, this is just an inverse real yields play. So, for the rally to continue, you’ll likely need more of what you see in the visual below.
The surest path to further gains is the successful suppression of the opportunity cost of holding the yellow metal. Deeply negative real rates are, of course, stimulative for risk assets too, especially to the extent they serve to push the dollar lower. Simply put: Nothing precludes gold from rallying alongside stocks, just as it did in 2020.
Meanwhile, digital gold (i.e., Bitcoin) quadrupled over the year, ostensibly on some of the same dynamics driving real gold higher, but also on what was variously billed as “increased institutional interest” and “wider adoption.”
Regular readers are fully apprised of my take on this. Bitcoin is a pure play on the greater fool theory. As long as there’s a greater fool, you’re fine. But it’s a confidence game. There’s no tangible underlying asset, no deliverable, no internal rate of rate of return, and Bitcoin has no meaning by reference to anything other than traditional currencies.
If conversion to dollars (or yen, or euro, etc.) is made illegal by government decree, it will be contraband — only without the benefit of being a physical good, which is what allows trade in other kinds of contraband to continue irrespective of the government’s wishes.
For now, it’s a rip-roaring, delirious frenzy. Bitcoin hit a new high on Thursday, surging through $29,000.
Meanwhile, VanEck is angling to launch an ETF. It would track the performance of the MVIS CryptoCompare Bitcoin Benchmark Rate. The SEC filing is nothing short of hilarious.
“Digital asset networks are dependent upon the internet,” VanEck reminded regulators, who will surely remain skeptical, irrespective of who’s in charge at the SEC. “A disruption of the internet… would affect the ability to transfer digital assets, including bitcoin, and, consequently, adversely affect their value,” the filing added.
As Bloomberg dryly noted, “it’s a bold move for the New York-based firm.”
Read more: Bitcoin, The $28,000 Derivative Of Netizens’ Collective Imagination
…distaste for gold and something even worse for bitcoin. Regular readers know this already.
The chart that uses the Lexus ES as a measure of value is cute but biased. A car is an all or nothing purchase. Bitcoin the asset can be purchased in fractions, the smallest being 1/100,000,000 of a unit.
The comparison of a pleasure now to an asymmetric bet on the future is colorful. The Lexus SE will fully depreciate, the steel reconstituted two or three times over the next 30 years. It’s the asymmetric bet that is in play but not shown. The bias is in the chart itself. I’d suggest using a ratio with the value of the Lexus SE in the numerator and the value in currency units (yes, the deadly flaw) in the denominator. And, plot it over several years.
I was reading through the S-1. There are various risks included, government regulation among them (and you mention this one). However, “a disruption of the internet” is a risk common for many facets of financial, and non-financial life.
In fact, when searching the Van Eck S-1, I didn’t even find an occurrence of the “disruption of the internet” string.
An example of a risk that is characteristic to bitcoin (the asset), though more technical, is this one: “Miners May Cease Expanding Processing Power to Create Blocks and Verify Transactions if They Are Not Adequately Compensated.” We’ll have to wait for the draft of the Coinbase S-1 to become public before we know if they address this one in their Form.
The bitcoin threads you weave into your articles are your weakest. Whether someone likes it or hates it doesn’t matter. That it’s a mania, that it’s derided, or that it’s going to zero, banned, etc, are great for color but are not the point. What is important is what motivated so many people to put so much energy into it. What problem are they trying to solve? Why is it important to solve? How does it tie in with the angst that is everywhere it seems?
You’re one of only a few writers who can address questions of this nature, interleaved masterfully with different threads, using common language, and relate it all to daily life.
Currencies are agreed-upon fictions. That currencies change over time and across borders indicates that confidence, and confidence primarily, imbues a currency with value. When the deliverable is pure utility, it makes no difference what the exchangeable bit itself is made of: shell, leather, beads, base or precious metals, paper, electrons in databases.
Precious metals have no value by reference to anything except common currencies. Their value/oz. is never expressed otherwise. It doesn’t work the other way around. The value of US dollars does not rise and fall in relation to some intrinsic noble property of gold, silver, platinum, or palladium. These metals have zero utility as currency, even silver and gold originally struck as coins. While you could spend your pre-1965 quarters in the laundromat, you’d be a greater fool for doing so. Trade your (precious) silver for a great many more (base) quarters and realize a far greater utility in keeping clean all of the sweatpants you acquired this year.
What do lesser fools do with their junk silver? Nothing, as it has no value apart from being a “store of value.” They park it in a home safe, or a bank safe-deposit box, or in a dark corner of the basement, or maybe keep rolls of it tucked into the boxsprings (my grandparents did this) and note, at intervals suitable to them, the change in value it has in reference to the currency of the realm.
Wouldn’t a disruption of the internet would screw over everyone? Most assets have been adapted to a digital existence. I own no bitcoin but the dollars in my checking account are, for all practical purposes, a digital asset. Shares of stocks in my brokerage account are digital assets. Since March I can count on one hand the number of times I’ve removed a bill from my wallet. The credit card, on the other hand.… Yet the card would be severely hobbled, if not rendered unusable, in a disruption of the internet. Haven’t seen one of those mechanical card-impression machines in years….
But if you’re in post war Germany or Zimbabwe or any place where the local currency has fallen, you could always take your gold to any other country and find someone who would exchange it for the going rate and you wouldn’t lose your shirt on it.