Is gold only for the true believers?

Gold’s crown is a little tainted by its recent price retracement, which has taken the yellow metal roughly back to where it was a year ago. Instead, Bitcoin has smashed the ball out of the park. Why is there such a difference between these two?

At an elementary level, both assets play to the concern that monetary policy is undermining the value of fiat currencies, and as an insurance against nefarious policies.  

Gold has obviously been around for years. It is durable, incapable of destruction, and it is fungible, as gold is gold regardless of its presentation. It can be divided and is portable. Scarcity is a more vexed issue. There is a finite amount in the earth, with possible new deposits to be discovered. But there are many non-financial holders that could add to investment supply.  

The predominant influence is, however, simply the belief in its value. History has repeated the role of gold for centuries, embedding its status in times of strife.

Since the deregulation of major monetary systems from the gold standard in the 1960s and 1970s, the price has reflected either extreme events such as the oil price spike of the early 1980s or relative exchange rates. The key has been psychology.

Many believe gold is a safe investment asset. It may be a physical good, but its price volatility would not align with other so-called low-volatility options.  

Bitcoin has similar characteristics. Its favourite premise is to void government oversight or interference. The mathematical and energy complexities portray its scarcity, with the set limit yet to be tested. And the existence of other “crypto” coins muddies the scarcity water. Some may be hesitant on BTC’s portability given the difficulties that some exchanges have with other crypto currencies.

But the end result is the same as for gold. It depends on a system that coalesces around its use as a vehicle to hold monetary value. There is naturally a small irony that Bitcoin’s value is stated in USD when its role is perceived to subvert these currencies.

Where it can diverge from gold is if it finds a role in payments and finance rather than as a speculative asset. The recent sharp rise in the price and volatility undermines that status.

Investors risk conflating a messy case on loss in sovereign currency value (due to debt issuance) with a created asset that has yet to prove its validity as a safer store of value. Bitcoin’s true potential may rather be in transactional power and movement of money. Whether this sits well with regulators and the inevitable undercurrent of undesirable activity remains to be seen. The outcome may well be some form of regulation or oversight which then takes crypto-currencies into the mainstream.

Giselle Roux

Giselle Roux is one of Australia's most well-known and highly regarded investment strategists, having held the role of Chief Investment Officer at both Escala Partners and JB Were. She has also held a number of senior equities analyst and investment banking roles including with Citigroup, Bank of America Merrill Lynch and McIntosh Securities. Giselle is a host of Inside Network events, a member of the Advisory Committee and regular contributor to the Inside Adviser and Investor publications.