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Gold versus bitcoin: the long and the short of it


It’s been an up-and-down start for gold in 2021 as the price initially rocketed through the US$1,950 mark, and then drifted back some way after the dollar strengthened in response to a crucial win for the Democrats in Georgia.

Shortly after the Democratic victory, President Trump conceded the Presidential race too, removing at least one major uncertainty from the minds of investors, albeit that he tried to go out with a bang and not just a whimper.

And, with what looks like a smooth transition of power ahead in the US, the divided narrative arcs of the US media will likely coalesce again, at least to a certain degree, and people will be able to quantify just that little bit more what exactly does lie ahead.

Although the newfound political stability won’t be particularly supportive of gold, especially since the Democrats now control all three branches of government and are unlikely to face significant obstruction, there are still significant enough grounds to remain bullish.

First, the incoming President has promised more stimulus, and the supply of dollars will be increased accordingly. That will provide an ongoing continuous upward pressure on the gold price, as the gold supply will remain steady during the same period, and thus relatively speaking more scarce than dollars.

Second, the inflation outlook in the US now shows that the 2% threshold is likely to be breached. That’s good for gold too, as gold tends to hold its value, while other prices are moving around.

Whether or not bitcoin will eat into gold’s market share as the safe haven asset of choice remains to be seen. Bitcoin has significant advantages over the dollar in the minds of nervous investors, in that it can’t be diluted, or debased, in the same way that fiat currencies can.

Gold can’t be debased either, but it also can’t be traded electronically, other than in derivative form in products offered by the likes of Tally []. Certain providers of goods and services are already accepting payment in bitcoin, in a way that they’re never likely to for gold, or even gold-backed derivatives.

But bitcoins flexibility in the virtual world is also likely to put off a certain class of safe haven investor. After all, if your computers and mobile phones are still working to the degree that you can make bitcoin payments – with the added implication that it still worthwhile transferring bitcoin from one party to another – then it’s arguable that the worst case scenario hasn’t yet arrived.

Gold retained its value throughout countless ages in which electronics weren’t even dreamed of, and such transfers of wealth and information as take place now at the touch of a keyboard would have been considered acts of God.

Whether bitcoin offers that sort of longevity is open to serious doubt. True, the likelihood of a global apocalypse wiping out all electronic communication seems small at the moment. But if you’re not factoring it in, what are you doing buying a safe haven asset in the first place.

Far more dangerous for bitcoin is the likelihood that states and governments will legislate them out of existence. Already certain bitcoin derivatives have been outlawed, and attempts at starting cryptos by major companies like Facebook have been given the kybosh in no uncertain terms. As long as it remains niche, it will quite likely be allowed to bubble along nicely.

But as soon as a serious challenge to the powers of central banks to create and manage currencies comes, the strong arm tactics will come out. Big Tech doesn’t know it yet, but it’s coming for information – can anyone seriously believe that next time the Republicans are in power they will allow Section 230 to remain in force?

So too with bitcoin. As it stands, small is beautiful, and size matters. Gold, on the other hand, is a known quantity, and poses no threat to central banks or governments. On occasion they even use it for their own ends.

And in the end, it’s that durability and versatility that guarantees that in a thousand years time gold will still be a major asset class, and bitcoin will be a forgotten memory, at most a footnote to history.

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