Cryptocurrencies Are Not A Substitute For Gold
Gold is an extremely liquid yet limited asset, and it is no one’s liability. It is purchased as a high-end piece of jewellery as much as an investment. As such, gold can play four basic functions in a portfolio:
- a source of long-term returns
- a diversifier that can mitigate losses in times of market stress
- a liquid asset with no credit risk that has outperformed fiat currencies
- a means to enhance overall portfolio performance.
Cryptocurrencies might become a recognized part of the financial system. But, in our view, gold is extremely different from cryptocurrencies, as gold:
- is less volatile
- has a more liquid market
- trades in an established regulatory framework
- has a well-understood role in an investment portfolio
- has little overlap with cryptocurrencies on many sources of demand and supply.
These characteristics underpin gold’s function as a mainstream monetary asset that will likely continue to resonate in today’s digital world.
Cryptocurrencies And Gold – Competitors Or Complements?
Regardless of anecdotal remarks from some well-regarded financial commentators that gold prices and its demand are experiencing the rally in cryptocurrencies, there isn’t any quantifiable evidence to support this. The weakness in physical demand in 2017, for instance, along with the paltry sales of US Eagles, was mainly described by the constant march higher of the S&P 500. Other established gold markets, such as China, saw healthy levels of demand. In general, the level of the gold prices in 2017 seemed constant with drivers of the previous couple of years and revealed no signs of struggling with crypto-competition.
Another aspect to think about is competitors within cryptocurrencies themselves. There are currently over 1,400 cryptocurrencies available and, while bitcoin is the largest without a doubt, new technology might have devastating impacts on the value and supply of any of the cryptocurrencies, including that of bitcoin.
Blockchain innovation, the dispersed ledger mechanism that underpins cryptocurrencies such as bitcoin, is truly ingenious and might have wide-ranging applications throughout monetary services and beyond. In the gold market, different players are checking out blockchain in the context of transforming gold into a ‘digital asset’, tracking gold provenance across the supply chain, and presenting effectiveness into post-trade settlement procedures. Such applications are generally developed on private blockchains operated by trusted parties instead of using bitcoin or other ‘public blockchains’.
At a high level, there are some similarities between the supply profile of gold and cryptocurrencies. The stock of bitcoins, for example, increases in number at a rate of around 4% per year, and is engineered to gradually decrease to zero growth around the year 2140. While gold can be mined without a date limitation, its production rate has actually been rather limited and consistent. Roughly 3,200 tonnes of gold have been mined usually, each year, including about 1.7% to the overall stock of gold ever mined. Bitcoin’s future diminishing growth rate and a supreme limited amount are plainly attractive attributes, as is gold’s shortage and limited yearly development.
Why Gold, Why Now?
Gold is ending up being more mainstream. Given that 2001, financial investment demand for gold worldwide has actually grown, on average, 15% annually. This has been driven in part by the advent of new ways to access the market, such as physical gold-backed exchange-traded funds (ETFs), but likewise by the expansion of the middle class in Asia and a renewed focus on reliable risk management following the 2008 – 2009 monetary crisis in the United States and Europe.
Today, gold is more pertinent than ever for institutional financiers. While reserve banks in industrialized markets are relocating to normalise financial policies, leading to greater interest rates, we believe that investors might still feel the results of quantitative easing and the extended duration of low-interest rates for several years to come.
Numerous financiers are drawn to gold’s role as a diversifier, due to its low connection to most traditional assets, and as a hedge against systemic risk and strong cryptocurrency market pullbacks. Some use it as a store of wealth and as an inflation and currency hedge.
As a tactical asset, gold has traditionally improved the risk-adjusted returns of portfolios, delivering returns while reducing losses and providing liquidity to satisfy liabilities in times of market tension.
Gold is not only useful in durations of greater unpredictability. Its price has actually increased by approximately 10% per year since 1971 when gold began to be easily traded following the collapse of Bretton Woods. And gold’s long-lasting returns have been equivalent to stocks and higher than bonds or commodities.
A High-Quality, Hard Currency
Over the previous century, gold has significantly surpassed all major currencies as a way of exchange. This includes instances when significant economies defaulted, sending their currencies spiraling down, as well as after completion of the Gold Standard. Among the reasons for this robust performance is that the offered above-ground supply of gold has actually altered little in time, over the previous two decades increasing around 1.6% per year through mine production. By contrast, fiat money can be printed in unlimited amounts to support monetary policies.
Will Today’s Fiat Solution Become Tomorrow’s Problem?
A growing diversity of investors are expressing concern over the outlook for fiat price stability. Their worries originate from the aggressive policy actions that have been put in place all over the world in an attempt to stop the international economy moving from a deep recession into a 1930s-style deflationary depression.
US Federal Reserve Chairman, Ben Bernanke, “wrote the book” on deflation, literally, in his 2000 publication ‘Essays on the Great Depression’. The book defines the destructive impact that deflation can have on an economy and why it ought to be prevented at all costs. In current times Bernanke practised what he preached, cutting rates of interest extremely quickly from 5.25% in mid-2007 to effectively zero and instigating an unmatched quantitative easing (QE) program, buying up vast quantities of mortgage-backed securities and Treasury bonds, to name a few. Considering the start of the monetary crisis in August 2007 through to the end of May 2009, the Fed broadened its balance sheet from US$ 869bn to US$ 2,081 bn.
The Fed is not the only central bank that participated in QE procedures. The Bank of England, Bank of Japan, Swiss National Bank and even the notoriously cautious European Central Bank have all embraced QE in one way or another. However, financiers are growing concerned about the exit strategy. May the reserve banks leave the rate of interest too low for too long? They will be keen to avoid the criticisms imposed at the Japanese authorities in the 1990s, who were commonly blamed for not doing enough to fend off deflation and reversing some policy actions too rapidly. But central banks are walking a fine line. Pumping too much money into the world economy for too long risks making today’s monetary option into tomorrow’s issue: a sharp increase in inflation.
So Where Do Cryptocurrencies & Gold Hedging Come In?
Hedging is often thought about as an innovative investing method, but the principles of hedging are fairly basic. Most people have, whether they know it or not, taken part in hedging. For instance, when you purchase life insurance coverage to support your household in the case of your death, this is a hedge. You pay money in regular monthly amounts for the coverage supplied by an insurance company. Although the textbook meaning of hedging is a financial investment taken to limit the risk of another investment, insurance is an example of a real-world hedge.
There are many cryptocurrencies in the market today which are backed by gold and if that is your preference then so be it, but why invest in a gold backed crypto, when you could just as easily diversify your portfolio by the simple act of buying gold.
What has not as yet materialized in the cryptocurrency space is a blockchain where the inherent risk of investment is ‘hedged’ with gold. However, to our knowledge, this is about to change.
Blockchain startup EziGold is in the process of utilizing gold as a hedge against their cryptocurrency and digital hosting business, whereby each masternode (a type of cryptocurrency savings account) will be hedged by a percentage in physical gold. Our understanding is that this percentage will fall between the 40 & 60% range with an emphasis towards the higher end. This will effectively be an equivalent to a built-in stop-loss against pricing volatility and future business endeavours.
Until then, potential members of this exclusive offering can register their interest via their website (https://www.ezi.gold) and secure a 20% discount voucher towards their eventual masternode hosting and collateral costs. The Founders are also promising direct communication with these registered members to share their innovative model prior to launching worldwide.
“There will be ZERO ICO, we are firm believers in self-funding our projects and we see no reason to change our approach to this potentially groundbreaking solution”