Gold’s power as an established and reliable store of wealth is undeniable & unchallenged. History however provides examples of when the use of gold has been complimented with various means of short-term pricing & transaction.
There is understandably much discussion at present surrounding the phenomenon that is Bitcoin. Certainly its divisibility, fungibility and lack of counter-party risk alone see it share properties with the long established kings of sound money, gold and silver. It seems curious however that many, including financial experts, speak in a manner that implies that precious metals and cryptocurrencies are adversarial in nature; competing for the affection of investors and traders alike.
A good example of this mindset is the recent video exchange between Peter Schiff and Max Keiser at Freedom Fest, published on RT.
To address this mindset, today let's summarise a piece by Nathan Lewis of Forbes who argues that Bitcoin and Gold should not be viewed as mutually exclusive assets and by using them in tandem, an individual can build a portfolio that provides for long term financial stability with transactional convenience and no counter-party risk.
Nathan writes that “gold and Bitcoin are actually somewhat complementary – that one’s strengths are the other’s weaknesses, and vice versa. This suggests that gold and Bitcoin together might have some role in our future. It's common to see Bitcoin even represented visually as a sort of gold coin.”
forbes.com
Gold’s strengths will not be news to this audience and include thousands of years of established stable value. Ancient gold coins from the Ptolemaic Dynasty of Egypt for example can easily purchase what they could during the Hellenistic period, even when disregarding the numismatic value obvious in this particular example. This stability is well suited to saving and storing wealth for long periods of time and is useful for the pricing of longer term instruments that would otherwise be distorted through the erosion of inflation.
One of Bitcoin’s strengths is its transactional utility. From the settling of international invoices to the ability to geographical diversify funds, Bitcoin has provided a means to avoid the costly and lethargic mechanisms characteristic of wire services such as Western Union. Notable however is Bitcoin’s lack of history and hence its present inability to reliably store value.
Nathan concludes that he can “see a situation where gold can be used somewhat like a ‘savings account,’ and Bitcoin as a ‘checking account.’ You would keep a Bitcoin balance for transactions, but maybe not a large amount. Bitcoin could be sold for gold, or gold for Bitcoin, as the need arose, to replenish your transaction account or transfer value to long-term assets. Prices and contracts might be denominated in gold, but payment made in Bitcoin at the daily market rate.”
Interestingly, this complimentary approach is not unique in history and can be observed in the use of the gold Solidus (pictured below) during the ancient Byzantine Empire prior to its fall to the Ottoman Turks in the mid fifteenth century. Nathan explains that “the Byzantine Empire had a system that was based on a highly-reliable gold coin, the Solidus, which did not change in value for over seven centuries. However, especially during the fourth century, most commerce was conducted with a variety of junky copper coins, whose market value against the solidus was quoted daily.”
britannica.com
Other examples of the historical separation of price benchmarking from transacting can be found. Ancient Mesopotamia is understood to have utilised silver for the quotation of prices yet relied on the exchange of other commodities at the market silver rate for physical payments. It could be argued then that Bitcoin is partly a modern implementation of a historically established mechanism that compliments gold’s strengths rather than competes with them.
Those interested in learning more may be interested in the upcoming NUU Understanding Money Conference. Scheduled for Saturday 26th August, this conference will exhibit a range of presenters on a number of topics from the definition of money, its past and future, cryptocurrencies and of course gold as the oldest form of money. Ainslie Bullion will be presenting at the event and we look forward to seeing you there.
This original post was written this morning for Anslie Bullion.