All That Glitters Is Not Gold (Including Gold)

“We study history not to know the future but to widen our horizons, to understand that our present situation is neither natural nor inevitable and that we consequently have many more possibilities before us than we imagine.” Yuval Noah Harari

Gold has been valued as a precious commodity for millennia. No wonder it retains consensus as a store of value. It has stood the test of time.

But gold has lost some of its investment allure.

It has been a less reliable hedge against inflation than inflation-protected Treasuries (TIPs). Moreover, gold is less exciting than Bitcoin as a store of value removed from the whims of governments and fiat currency mismanagement.

Inflation is surging, central bank money-printing has run amok, and political tensions between the world’s powers intensify. These ingredients sound like the alarm bells for ardent believers in the long-term promise of gold. As a result, it is even tempting mainstream investors to increase their precious metal holdings. So why then did gold record its worst annual performance in six years?

Valuing gold poses problems because it is not an income-producing asset. It doesn’t generate a stream of income, and the cash-flow models we have learned to determine whether assets are cheap or expensive can’t be applied.

Demand for gold tends to be speculative.

The answer for investors would once have been clear. Overconfidence in the safety of paper money and government-issued bonds often leads to catastrophic breakdowns of financial institutions. The argument goes that gold, on the other hand, has stood the test of time. Only in 1863 did the dollar become the United States’ official currency. For millennia, people have valued precious metals.

However, gold’s position as the last defense against currency manipulation is now being questioned. Bitcoin and other cryptocurrencies are becoming more mainstream as investment holdings. The asset class used to be too small to impair gold’s demand. The two most popular cryptocurrencies, bitcoin, and ether, now have a combined market valuation of ten times what it was two years ago. Based on the World Gold Council’s estimate of a little over 200,000 tons of gold above ground, that’s about a tenth of the estimated $12 trillion in gold assets.

As Bitcoin increases in value at gold’s expense as a store of value, gold may end up as an ornamental metal.

Bitcoin’s volatility and extreme price swings may discourage more conservative investors for the time being. However, this does not have to be a show-stopper in the long run. For example, gold began its existence as a modern financial asset in the mid-1970s with episodes of high volatility. Furthermore, it took almost two decades for gold to become extensively owned by institutions in America after its ownership was made legal in 1974.

Gold has found itself in an uncomfortable situation, sandwiched between more solid, stable assets on the one hand and more exciting, speculative crypto assets on the other.

Crypto, like gold, is built on a collective belief about its value. But so, to an extent, are all asset prices.

Check out my book on crypto assets:

‍