I’ve heard junior mining executives in Vancouver bemoan bitcoin stealing gold’s thunder as an inflation-proof alternative to US dollars. Much worse from their point of view is the cryptomania in general siphoning off speculative capital from mining stocks.
But these are very different things.
While the siphoning of capital may be happening, I don’t think that bitcoin is taking anything away from gold itself.
Let me address the siphoning issue first. Then we can move on to the more interesting question of gold vs. bitcoin. But first, I should add that I’m aware that the same siphoning complaint is now being lodged against weed.
My answer regarding both is: so what?
Interesting new flavors of the day are always soaking up speculative capital. The whole world saw this in a big way during the dot-com mania of 2000. Unsuccessful junior miners and other companies were changing their names to SomethingOrOther.com by the bushel. That’s the nature of speculative capital. It’s always looking for the next big thing. This very liquidity and propensity to rush into something exciting is why we like it when metals are hot. That cuts both ways. Get used to it.
Further, speculative capital’s short attention span is only a problem for companies that don’t present a compelling value proposition to investors. Companies delivering the goods manage to raise money, even when other investments are fashionable. And Mr. Market rewards a big discovery even when in the grip of a vicious bear.
From an investor’s perspective, it’s not important that executives of mineral companies that don’t have compelling assets in hand can’t raise money. Our job is to deploy capital where we do see a strong case for value to be added—including the ability to finance. We’re not charities. And we’re not here to guarantee employment for mining executives.
Enough said.
As for bitcoin competing with gold, let’s start by taking a look at the data.
The key takeaway here is that bitcoin and gold show almost no relationship at all. They are neither inversely related as competitors nor directly correlated as similar alternatives to the US dollar. In fact, since the first bitcoin transactions in 2010, the correlation coefficient between bitcoin and gold prices is a weak -0.22.
Second, despite all the frustration of gold bugs who think it’s underperforming—or suppressed by the government—gold looks like a shining example of stable value by comparison to bitcoin.
For me, that’s critical. I don’t buy gold as a speculation, though I do think it’s going higher. I buy gold because it’s solid, physical wealth that can’t be printed by the government—or hacked out of existence. Gold is where I put my savings. It’s said that 100 years ago, one could buy a good suit for one ounce of gold. That’s still true today. In fact, I did just that the last time I was in Paris. This long-term stability is important, valuable, and unique to precious metals.
Now, I want to pause and say that I am not anti-bitcoin. I’ve loved the idea of non-government-issued digital currencies since before bitcoin was created (though I admit that even then, I favored gold-backed digital currencies). I get the significance of blockchain technology—and the even more important underlying innovation of distributed ledger systems. I think these things are game-changers that will improve our world going forward.
My points are, simply:
- The ability of cryptocurrencies to protect value over time has yet to be demonstrated. Gold has a several-thousand-year track record of doing this job admirably.
- Bitcoin is not stealing gold’s thunder, eating its lunch, nor any other colorful way we can think of saying that gold prices would be higher if not for bitcoin.
That’s my take.
