Will Cryptocurrencies Replace Gold?

The World Gold Council has issued quite a few interesting papers recently. In this edition of the Gold News Monitor, we discuss the most provocative ones. Such as the money worthiness of gold compared to Bitcoin. Or the ongoing gold repatriation trend as Romania recently joined the fray. What kind of learnings can the precious metals investors draw here?

Cryptocurrencies Are No Substitute for Gold

In January, the World Gold Council (WGC) published an investment update about the cryptocurrencies. The main aim of the report is to refute the claim that cryptocurrencies could replace gold. The authors do not agree, pointing out that gold differs substantially from cryptocurrencies. In particular, the yellow metal:

• is less volatile – the dollar-denominated gold price is about 10 times less volatile than Bitcoin price;

• has a more liquid market - Bitcoin turnover is $2 billion a day on average, which is roughly less than 1 percent of the total gold market that has turnover of around approximately $250 billion a day;

• trades in an established regulatory framework;

• has a well understood role in an investment portfolio;

• has little overlap with cryptocurrencies on many sources of demand and supply;

• has broad appeal outside the tech-savvy demographics.

All these differences explain why Bitcoin and cryptocurrencies are not a substitute for gold. In particular, the former should not be considered a safe havens. The best example is Q4 2018, where global stock markets experienced their worst quarter since 2009 - cryptocurrencies then performed as risky assets and fell, while gold rallied. Although you can also pick periods when gold did not behave like safe-haven asset, we generally agree that cryptocurrencies are not substitute for the precious metals. Bitcoin was designed to mimic gold, but it has still to prove its moneyness, while gold has a proven few thousand years history as an monetary asset.

Gold Demand Trends in 2018

On the last day of January, the WGC published its summary of the gold market in 2018. From the market perspective, the developments of last year belong to the days of yore, so we will not analyze the whole market. However, we would like to point your attention to one important trend: central banks added 651.5 tons to their gold reserves in 2018, the second highest yearly total on record. And net purchases jumped to their highest since the end of gold standard in 1971, as more central banks turned to gold as a portfolio diversifier.

Importantly, the rise in official purchases was accompanied by the increasing repatriation of gold. Many analysts interpreted this as a signal of intensifying nationalism, but there is also another narrative. The repatriation of gold signals that the central banks stopped lending gold for any significant volumes. You see, when you want to lend out your gold, you keep it in the Bank of England, the Fed, or other systematically important third party location, not in your own vaults. It means that – despite many speculations – the central banks definitely less intervene in the precious metals market. That's good news for all investors who desire greater transparency and fairer price discovery process.

WGC's 2018 Annual Review

In February, the WGC published the review of its activity in 2018. Although most of the content is not interesting for the gold investors, the WGC included also its market outlook for 2019. In short, the organization believes that increased market uncertainty and protectionist economic policies should make gold increasingly attractive as a hedge. Moreover, the slowdown in the US economy could curtail rising interest rates and limit dollar strength, which would be supportive for the gold prices.

And in 2019, we should see increasing concerns about a global growth slowdown or even outright recession fears with resulting elevated stock market volatility, and political and economic instability in Europe. Indeed, that's exactly what has just happened – in the last edition of the Gold News Monitor, we have discussed the recent major policy reversal of the ECB following the slashed economic growth forecast for the euro zone, and its implications for the gold market.