Gold vs. Bitcoin – Which One Will Survive?
By Victor Sperandeo with the Curmudgeon
This week we take a break from our seemingly never-ending revelations and documentation of the many mania/bubbles in various asset markets. Our analysis this week is on Gold as a store of value vs Bitcoin as a pure speculation. But first, let’s look at the relationship between character, trust, credit, and money.
The Importance of Character and Trust:
There’s an interesting story about JP Morgan and Andrew Carnegie from the Panic of 1873. Carnegie was a client of the Morgan’s, with $50,000 on deposit plus some stocks. After selling his $10,000 interest in a railroad, Carnegie supposedly came by the office to pick up a check for $60,000. To his surprise, JP Morgan handed over a check in the amount of $70,000, explaining that the bank had underestimated how much cash Carnegie had on deposit.
Given what seemed like an obvious over payment, Carnegie initially refused to take the extra funds. He said, “Will you please accept these ten thousand dollars with my best wishes?” But Morgan replied, “No, thank you. I cannot do it.”
A clue as to why JP Morgan would so magnanimously pay Carnegie more than he expected, is found in his famous 1912 testimony before Congress, when he emphasized how character was most important.
“Before money, or anything else. Money cannot buy it,” he said. JP Morgan acted the way he did with Carnegie because he wanted to preserve his reputation of high character. Character, after all, was in his mind crucial to creditworthiness.
Why is character so important? Because credit is all about trust. When a bank extends credit to a debtor, the bank is trusting that he will honor his word and repay the debt on time. It doesn’t matter if the debtor is wealthy. If he is dishonest, he’ll have a hard time getting credit.
As JP Morgan said later in his testimony: “A man I do not trust could not get money from me on all the bonds in Christendom.”
JP Morgan on Money and Gold:
Q: But the basis of banking is credit, is it not?
JPM: Not always. That is an evidence of the banking, but it is not the money itself. “Money is gold, nothing else.”
JP Morgan makes a clear distinction between money and credit. Gold, unlike credit, is not dependent on a third party “coming through.” Gold is a physical good, while credit is essentially a promise. Gold can never default, but credit is only as good as the character of the borrower.
Morgan added: “…and nothing else,” because all other assets in the banking system at the time—including dollar bills—were forms of credit, whose value depended on the debtor paying it back. Gold was and is the only financial asset that bears zero counter-party risk.
Although JP Morgan spoke these words over a century ago, this essential difference between credit and money (gold) remains true today.
GOLD is Money!
Here are 10 attributes of Gold which conclusively proof its really money:
1. MEDIUM OF EXCHANGE
Gold can be used to buy and sell products and services relatively easily. If you want to buy a cup of coffee for $2.50 you can easily sell/exchange an ounce of gold for dollars to pay ~$2.50 in fiat currency... as virtually anyone will change dollars for gold.
2. UNIT OF ACCOUNT OR A MEASURE OF EXCHANGE VALUE
The unit of account in financial accounting refers to the words used to describe the specific assets and liabilities that are reported in financial statements, rather than the units or tools used to measure them.
Money is used as the common benchmark to designate the prices of goods throughout the economy. Unit of account, or measure of value, means money is functioning as the measuring unit for prices. In other words, prices of goods are stated in terms of the monetary unit.
3. LEGAL TENDER
You can legally pay U.S. government debts in gold, although this is not done often.
4. STANDARD OF VALUE
A standard of value is an agreed-upon worth for a transaction in a medium of exchange, such as in U.S. dollars or in gold.
A standard of value is needed so the value of goods and services can be “consistently” determined.
Without a standard of value, other ways of exchanging goods may arise, such as a barter system.
5. STORE OF VALUE
Gold acts as a store of value because its value is adjusted by inflation. In the 108.25 years since January 1913 (when the U.S. government OFFICIAL statistics were first published on the CPI):
· The CPI has appreciated 3.07% compounded annually, while Gold has appreciated 4.17% per year (from $20.67 to $1715.6 an ounce) or +35.8% more per year than the CPI.
· Something that was valued at $100 dollars in 1913 is now valued at $2640.01, while $100 Gold then is now valued at $8,331.28 as of March 31, 2021.
Examples of fungible goods include oil, bonds, gold and other precious metals, money, and unopened items of consumer products on store shelves such as boxes of oatmeal or cereal. They possess fungibility (the ability of a good or asset to be interchanged with other individual goods or assets of the same type) if they have identical value and properties of other items; For example, diamonds are not fungible due to differences in quality.
You can carry or move gold coins reasonably easily. Five 1 oz coins are worth ~$9,000 today.
Gold does not rust or erode its character over time.
Gold can come or be changed in different weights, e.g., 10 oz., 1 oz., 0.5 oz., etc.
10. INTRINSIC VALUE
Gold has intrinsic value in that it has established costs: discovery, mining/digging to get it, minting, etc. The result is a real item that has a cost value. The “general” cost to derive/manufacture an ounce of gold is estimated to be $1,200 per oz by most miners.
Gold as a store of value has a history or over 5,000 years. As far back as 4000 B.C., the yellow metal was used to make decorative objects, according to the National Mining Association.
Also, there is evidence of a gold/silver value ratio around that same time period, according to the code of Menes, the founder of the first Egyptian dynasty. It’s stated in this code that “one part of gold is equal to two and one half parts of silver in value.” That is the earliest documentation of a value relationship between gold and silver.
For more of my thoughts on Gold, please read: A Historical Review of Money and Gold in the U.S., Q&A On Gold—Past, Present and Future, How to View Gold and Why It Might Be Bottoming Now! and Why Gold Is More Than a “Pet Rock.”
Assessment of Bitcoin:
Bitcoin is a cryptocurrency (crypto) created in 2009. Market places called “bitcoin exchanges” allow people to buy or sell bitcoins using different national currencies, e.g., US dollars, Euro’s, Yen, etc.
Bitcoin can be used anonymously to conduct transactions between any account holders, anywhere and anytime across the globe, which makes it attractive to criminals and terror organizations as there’s no paper trail to track.
It is a digital concept, rather than a real object. There is no intrinsic value. Instead, it is pure SPECULATION! Bitcoin’s primary value is its SCARCITY in that a limited quantity is created, e.g., about 21 million Bitcoins.
You also need electricity/battery power and a computer/smart phone to hold and use Bitcoins. Lots of things could go wrong:
· If your computer crashes, you may lose your bitcoins temporarily or maybe forever.
· If you lose or forget your password, you could lose your bitcoins.
· Other ways of losing your bitcoins are possible.
NOTE: In sharp contrast, Gold never disappears. It has unquestionable staying power as we’ve previously stated.
Bitcoin is now being used as a medium of exchange. An increasing number of companies are accepting payments in Bitcoin. A January 2020 survey by HSB revealed that 36% of small-medium businesses in the U.S. accept Bitcoin. The most popular companies accepting Bitcoin payments worldwide today are Wikipedia, Microsoft, and AT&T.
Just before opening day, the Oakland A’s announced they had sold a luxury suite for the 2021 season for one Bitcoin. Cryptocurrency broker Voyager Digital Ltd., a publicly traded company, bought the luxury suite for the 2021 A’s baseball season.
Incredibly, there are at least 15,909 Bitcoin ATMs in the U.S. To find one near you, look here.
No one really knows if Bitcoin is a store of value during inflationary times. For sure, it does not possess the many features of Gold.
Most importantly, government(s) could easily cause the value of Bitcoin and other crypto’s to decline with new regulations. For example, requiring taxpayers to check a box on their tax return (to collect a “Crypto Tax”) for holding Bitcoins or other crypto’s would be a deterrent for ownership. It could also precipitate fraud or perjury. Some believe that when governments earnestly begin serious regulatory oversight, it will be the end of the boom in digital Bitcoin and other crypto’s.
Also, competition is widespread. Investopedia says that there are more than 4,000 cryptocurrencies in existence as of January 2021. Please see next sub head of this post for more on this theme.
In summary, Bitcoins are mainly used as a speculative “investment” and not as an alternative currency and medium of exchange. That said, Bitcoin has created great wealth for the speculators that bought and held it.
For those who want to view a Bitcoin debate, I recommend Real Vision: “The Best Bitcoin Debate Ever Recorded (Anthony Pompliano vs Mike Green).” While I don’t know Mr. Pompliano, Mike Green is as intellectually sophisticated as anyone on Wall Street. No exaggeration.
I wish I was part of the debate as they don’t cover the points I’ve made in this and other Curmudgeon blog posts.
Other Crypto’s and Coinbase (Crypto Currency Exchange):
While being the oldest and most successful crypto to date, Bitcoin was soon followed by many others, including Ethereum, Litecoin, Dash, Ripple and many more.
The big tsunami on Wall Street last week was the direct listing of Coinbase -the crypto currency exchange. With 261.3 million diluted shares outstanding, Coinbase now has a market capitalization of about $86 billion, according to Barron’s.
That eye opener was quickly topped by the Dogecoin cryptocurrency surging to an all-time on Friday morning – almost tripling its value in just 24 hours. The Dogecoin cryptocurrency started as a joke in 2013 based on a Shibu Inu meme. It exploded in value this past week.
Tulip Mania vs Bitcoin:
At its peak in 1637 tulip bulbs were worth the equivalent of two houses. Then its price collapsed! Please see chart below.
The fundamental value did not match its emotional desired value. The risk is similar with Bitcoin and other crypto’s. Have a look at this chart:
Additional Gold Facts and Comments:
Not known to most market observers: Gold has outperformed the S&P 500 in the last 21 years (from 12/31/99 to 12/31/20) by 41%. S&P 500 +6.6% total return, Gold +9.3% vs. CPI +2.1%! As a huge critic of gold, Warren Buffett’s Berkshire Hathaway underperformed Gold by 9.0% over that time period.
Gold could drop to $1200 per ounce or slightly lower, but then production ends. Fundamentally, there is a floor price for Gold.
Do you think there’s a floor price for Bitcoin?
1. Bitcoin may continue to rise until something causes it to lose the confidence of speculators. Then it could crash and be virtually useless as a medium of exchange (with the exception of fraudsters, criminals, and terrorist organizations). It only has a few of the positive attributes of Gold and has no real “staying power.” Thereby, it is not the equivalent of real money, which Gold certainly is.
-->I’m not a bitcoin buyer (neither is the Curmudgeon), as it is purely a concept rather than a fundamentally based asset. On the other hand, I love Gold and Silver.
2. It’s ironic that Alan Greenspan, who created the “FED PUT” and knows so much about Gold, set the precedence for the Frankenstein Fed, which has become the greatest monetary inflation creator in American history.
Each Fed Chair since Greenspan has launched increasingly easy monetary policies which would previously have been thought to be unthinkable.
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.” Alan Greenspan
The oceans of newly created fiat dollars (the world’s reserve currency) fueled bubbles in financial assets as well as Bitcoin and other cryptos.
All bubbles eventually burst. The bigger the bubble the larger the pop and subsequent crash damage.
Yes, we’ve said that many times before…….
“I know of only three people who really understand money. A professor at another university. One of my students. And a rather junior clerk at the Bank of England." John Maynard Keynes
“Bitcoin is one of the most viral concepts I've ever encountered.” Barry Silbert
“Bitcoin is like anything else: it’s worth what people are willing to pay for it.” Stanley Druckenmiller
“Bitcoin is absolutely the Wild West of finance and thank goodness. It represents a whole legion of adventurers and entrepreneurs, of risk takers, inventors, and problem solvers. It is the frontier. Huge amounts of wealth will be created and destroyed as this new landscape is mapped out.” Erik Voorhees
Read more Bitcoin quotes here.
Stay calm, be healthy, optimism is the word, and till next time……
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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