3 Traditional Gold Price Drivers & How Crypto Disrupts Them

Some claim Crypto is a replacement for Gold as an investment and while there may be some truth to this claim, it is worth having a deeper look at how and why this might be true. I’ve studied Gold and its traditional price drivers a bit over the last few years before I got involved with Crypto. I can confirm that for me at least in 2017 my Gold purchases have slowed and this year many of those Gold purchases were replaced by Crypto purchases. Am I the only one who’s been buying Crypto instead of Gold? Is it a trend that is a sign of things to come?

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Gold is quite unique and unlike most other commodities or assets I have studied. In my experience there are 3 diverse and different uses for Gold. The demand for each use has become what I would consider the traditional price drivers for the yellow metal. Here I will take a brief look at each of them and compare Gold to Crypto to see how they might differ and whether Crypto might be pulling demand away from Gold.

1. Gold the Safe Haven Asset

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Gold is as old as time itself and throughout human history (even as far back as the ancient Egyptians) Gold has been cherished not just for its beauty but also it’s durability and it’s position as the ultimate store of wealth. It doesn’t erode or decay and there has always been demand for Gold. While government issued fiat currencies can come and go by the hundreds, Gold always endures. Whenever there is political uncertainty or war there has been Safe Haven demand for Gold to bid the prices up. Today we see it whenever the North Korean flashpoint flares up. We saw it with Trump being elected. The reason is that when there is fear and uncertainty then it makes more sense to hold Gold than government issued fiat currency. Especially when there is war, if you are on the losing side and have all your wealth in fiat….well there is a good chance your wealth will be gone if your government is gone. Even if you win the war, your country may need a massive rebuilding effort and chances are the government will print up money to pay for it and thus dilute your wealth. If you need to flee the country in fear of your life with not much more than the shirt on your back….well you can stick some Gold coins in your pocket and know that wherever you might end up they will end up being worth something and those Gold coins can help you secure a new life.

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Crypto Disruption – When it comes to “Capital Flight” like I described above then this is where Crypto beats Gold hands down. You could stick a hardware wallet in your pocket or even a piece of paper with your 12 word mnemonic phrase and Get Outta Dodge with your wealth intact. You could even memorise the phrase and have no fear of any border security strip search or theft on your way out. We are seeing a lot of Crypto demand coming from South Korea – Is that because they are early adopters of technology? Or are they preparing for the worst because they are in the firing line should the North Korean situation blow up? Or is it the Chinese, banned from trading Crypto in their own country popping up in a nearby neighbour? Maybe it’s all of the above, but Crypto still doesn’t have the stability and trust of Gold, so while there may be disruption here I don’t see Crypto replacing Gold as a Safe Haven Asset until it is more widely accepted and stable.

2. Gold the Inflation Hedge

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Governments like to print money and inflate their fiat currencies. Most governments in the West will openly admit to having a 2-3% ”Inflation Target”. So from year to year you will nearly always get less for your dollar than you did the year before. Most mainstream investors will put their fiat currency into a traditional bank to earn interest and the unwritten rule here is that the interest on your money in the bank should be enough to stay ahead of inflation, but it is not always the case. In the USA we saw official interest rates at zero for a few years after the GFC and in some parts of Europe and Japan they actually have NEGATIVE interest rates. It’s tough to get your head around but basically you are paying the bank interest for the privilege of having them hold your money for you…sounds crazy right? Well it’s happening! The easiest way to get a handle on whether Gold has demand as an effective Inflation Hedge is to take the Nominal Interest Rate and then subtract Inflation. The result is known as the Real Interest Rate and if this number is negative then people buy Gold because even the interest rate is not enough to overcome inflation. A very large part of the developed world currently experiences Negative Real Interest Rates.

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Crypto Disruption – Anyone who has studied Bitcoin would know there is intended to be a fixed supply of 21 million Bitcoins. It was designed to be deflationary and that makes it the opposite of fiat currency thus theoretically an excellent hedge against fiat currency inflation in its own right. We see a lot of investors flooding into Crypto assets now (especially in places like Venezuela) because it offers them a legitimate alternative to inflationary fiat currencies, so this is an area where Crypto definitely has the potential to replace Gold as an Inflation Hedge. Of course, we still have volatility to deal with, but it doesn’t take a big imagination to see that once we get mainstream adoption of Crypto and some stability then Crypto will be an attractive alternative to Gold as an Inflation Hedge.

3. Gold the Commodity

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Gold has a lot of special qualities. For a start, it is shiny and attractive so it is extensively used to make jewellery. It doesn’t matter what part of the world you’re from or what culture you live amongst, there is barely a woman alive who would not appreciate being given a nice piece of gold jewellery. It has traditionally been an excellent engagement or wedding present and as the metal itself is a store of value it has great utility in this regard for passing wealth through the family via heirlooms and inheritance. It is literally wealth that you can wear. Gold also is an excellent conductor of electricity and it does not tarnish so there are many industrial uses such as in the manufacture of electronics, dentistry, medical instruments and aerospace (to name just a few). It is also worth mentioning Silver here because while it also (to a lesser extent) has some appeal as a Safe Haven Asset and an Inflation Hedge it is also a commodity which has extensive industrial usage. When the world is at peace and governments are running their monetary policies responsibly (yes, I did almost choke writing that line because it’s NEVER happened), both Gold and Silver can fall back on commodity demand to provide some price support.

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Crypto Disruption – This is one area where Crypto can’t beat Gold. You can’t wear a Bitcoin or manufacture a computer with it. Try as you might to imagine it but Crypto does not have real world physical properties that would make it a consumable or physically usable commodity.

So where does this leave us? Don’t get me wrong I do love both Gold and Crypto so I like to hold both. While there are some similarities and perhaps competition between the two for some uses, they are still quite different and have strengths and weaknesses that are perhaps a bit complementary. I will even go one step further and suggest that with the current mania in the Crypto market in combination with the relative depression in the Gold market there is a strong case to make for Gold to be an excellent hedge against a crash in the Crypto market. Think of it in terms of a change in sentiment where Crypto may not be pulling Safe Haven and Inflation Hedge demand away from Gold. Surely a depression in the Crypto market would thus be bullish for Gold?

Ever heard the saying “Buy Low, Sell High” when it comes to investments?
Sounds simple really, but it isn’t always so easy to go against the herd.

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