Perspectives

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  • Scott Schamber

Learning From the Cracks in the Gold vs. Crypto Comparison Debate

The idea for this post emerged during a recent visit I made to our vault facility with clients to view their metals. Walking deeper into the main vault, where there were pallets upon pallets of the silver standard bars (avg. 1000oz, or 30 kg) stacked on one another, we were pointed in the direction of some darkly tarnished silver bars. We learned those bars were over 50 years old. I immediately thought of the gold/metals and crypto comparisons we’ve heard so much about in the past two years. How can you compare cryptos to this?


Over the past few years, gold and other precious metals had disappeared for many under the long shadow cast by bitcoin and cryptos. “Is bitcoin the new (digital) gold?” was just one title of many posts or articles one could find in a Google search from 2020 straight up to last month.


There’s been a lot written too about the comparisons, and even more so about which would serve investors better, when it comes to acting as an inflation hedge, a hedge against recessions, or corrections: bitcoin or gold? A strong pitch for cryptos, and bitcoin, was made based on the belief that since a fixed quantity could only be released, its value could never be diluted.


Bitcoin was also given the edge by many in that it could be used in the modern digital society, it doesn’t require extra security or physical storage, and despite the volatility and price declines this year, has shown a much more significant upside than gold.


Since hindsight is 20/20, it’s safe to say that calling bitcoin, and cryptos in general, the “new messiah” and the new version of gold was probably a bit premature. Cryptos certainly don’t have the history of that 50-year-old standard silver bar sitting with others in the back of the vault. What cryptos do have is the distinction of having declined an unprecedented amount over the past 6 months. Precious metals may not be as “sexy” – there was nothing electrifying about those massive, tarnished silver bars – but can you compare these silver bars that have held some kind of value for over 50 years (and centuries, for that matter) against these youngster cryptos that were just “born” 13 years ago?


This isn’t, by any means, an “I told you so” post…but it starts like it


I remember very clearly the calls I’ve taken from a few BFI Bullion clients since the middle of 2020 wanting to sell their gold and silver. When I was concerned if it had been our service that was inclining them to leave, or if there was something we could have done better, I was met by “no, you’ve all been great…but I want to invest in cryptos”.


And of course, we heard from the clients that were doing crazy-great in cryptos. Many of them still understood the value of having some gold, silver, or other metals as insurance, but the “flavor of the day” was certainly this crypto market that was shooting up in leaps and bounds.


Bitcoin Price history 2013 – 2022

Source: Statista


As recent as February this year, the Motley Fool, in an article titled, “Here’s Why Bitcoin is Better Than Gold”, wrote “Bitcoin and gold are always drawing comparisons in the investment world. However, it should now be strikingly clear that the cryptocurrency is becoming a much better place to park your money.”


However, in the very same article, they admitted, “To be fair, Bitcoin is extremely volatile and is a much more difficult asset to own for your peace of mind. To illustrate, someone who puts their entire net worth in physical gold would probably be able to sleep better at night than someone who went all-in on Bitcoin.”


I’ve always said that you’ll only hear the stories of those that really did well with their investments, as we did in 2020 and 2021, while the ones that don’t do well, obviously prefer not to talk about it. In any case and as you can imagine, these calls and discussions have disappeared, at least for now.


USD Gold Spot Price (blue) vs. Bitcoin (orange), June 29, 2012 – June 22, 2012

Source: Bloomberg


Is the crypto crowd learning the value of precious metals?


Just last week, I attended an event in Zurich with my good friend and work colleague, Marc Seidel, who works with our sister company, BFI Consulting, and the digital asset fund of fund offering of AltAlpha Digital. You may remember Marc from the Fireside Conversation webinar we had back on April 27th which focused on AltAlpha Digital. If not, feel free to have a look at the recording of that particular Conversation here.


The event was organized by a firm providing a “new frontier for investors and innovators in finance to engage in…to create and capture value that investing sectors might not be able to do so individually.” While the event promoted “structured products and sustainable investments in everything from commodities to fiat currencies and crypto assets”, the main focus was on innovation, meaning there was a focus on digital assets, cryptos, and FinTech in general.


While Marc and I were there to represent our BFI Capital Group in general, clearly the focus would largely be on our venture into the digital world. Being 50-years old, and working in the precious metals field, I was quite curious how purchasing and storing gold in Switzerland would play in this group.


In general, I could arguably say that this was a “crypto crowd”, and with the performance of cryptos since the start of the year being what it was, there were quite a few investors and market participants that were licking their wounds together. Perhaps you could say the event was a bit therapeutic for those investors for that very reason.

 

"It is now clear that bitcoin trades parallel to the risk assets, rather than [as] a safe haven," Ipek Ozkardeskaya, an analyst with Swissquote, said in a report in April. "Bitcoin is still not the digital gold, it's more of a crypto-proxy for Nasdaq, apparently."

 

What I did find fascinating was the willingness to discuss using physical precious metals as a hedge against crisis, as an insurance for what was happening in the stock markets (and now crypto markets as well), as a hedge against inflation, and even just the possibility of including it as part of one’s portfolio.


I had often thought that many in the “crypto generation” had only seen massive gains up to now, not experiencing loss in a way that would make them even consider having an insurance built into their portfolios. To me, it seems that may be starting to change now; physical precious metals just might be making their way out from the crypto shadow.


I’m still old fashioned, but willing to listen


I found one headline from January 2022 that read “Goldman says bitcoin will chomp on gold’s market share in 2022; price may hit $100,000 mark”. While this feels highly unlikely now, we all know that it can change fast, and very well might. While some believe gold could hit $5000/oz, I think you would be hard-pressed to find anyone that would say it could happen in a couple-months’ time.


When it comes to comparing gold, silver, and other precious metals with bitcoin and cryptocurrencies, I tend to agree with Adam Perlaky, a senior analyst at the World Gold Council, who was quoted in March this year saying, “There’s really no historical data on Bitcoin as an inflation hedge. There have effectively been no periods of high inflation during Bitcoin’s existence. There’s no data to back it up.” There’s little question that gold has a strong background, while Bitcoin has barely more than a decade of existence to justify itself.

You have to learn how to walk before you can run!


Are bitcoin and cryptos really comparable to – or better than – gold and other precious metals? It’s safe to say no…or at least, not yet. They certainly don’t have the history and long-term preservation record of those 50-year-old silver bars we saw in the vault yet. While there’s been bloodletting recently when it comes to cryptos and digital assets’ performance, just as we wrote in the BFI Capital Group’s Special Report, The Emerging World of Digital Assets – Why and How to Participate, we are clearly headed in their direction. While I’m a firm believer in gold and precious metals, I’m willing to listen.


I’ve seen written more than once, that “any investment is done with the purpose of earning returns”. And a lack of return is always a knock gold naysayers have against gold or other metals. Since I look at physical precious metals as insurance – and let’s face it, there’s nothing sexy about life insurance, car insurance, etc. – and I personally learned during the last recession how gold in particular did that for me, perhaps now metals will be looked at in a different light.


BTW…I’m going to go polish up those silver bars!

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