Gold and Bitcoin

Why do people buy gold and bitcoin? There must be many reasons, but we think one of the main reasons is uncertainty. Gold has always been regarded as a safe-haven buy. When things are not going all that well around the world, people like to invest in something tangible with a scarcity value and gold has always played that part. The important question, however, is why? If there is a catastrophic event that wipes out all electronic records on earth, rendering your financial assets worthless, surely your gold investments held electronically will also be worthless? The only value will be in actual gold, and if we are flung back into the dark ages, will a few Kruger Rands really help you?

Below is a 50-year graph of the gold price versus the S&P500, Dow Jones (excluding dividends) and silver. It is clear that gold is the winner and silver the loser.

Now take the same period, but add the dividends earned on the S&P500 and Dow Jones. Suddenly the share investments have been the best performers by far. And this has always been actual gold’s downfall; not offering you any yield. It pays no dividends or interest and if you hold the actual gold, it may even cost you money to store and secure.

There are specific periods during which gold may be helpful, but look at the last thirty years in our graph. You can see the under-performance of gold and silver even without dividends being added back to the shares.

So currently people are rushing back to gold for three reasons:

  • The US$ is weakening, which supports gold
  • Bonds, which are usually seen as another safe-haven asset, are not giving you any return
  • World economic growth has been slowing down since 2009, diverting investment away from other resources like copper and platinum, to gold.

Bitcoin cannot be regarded as an investment. It has to be treated as a speculative trading instrument. There is no fundamental underlying value indicator such as profit generated; the “value” is completely dependent on supply and demand. Bitcoin is only one of hundreds of artificially created cryptocurrencies and can be replaced as the dominant one at any time. The argument for crypto is that it will replace hard currencies like the US$, yen and euro as the monetary exchange of choice. This might be true, but for now your fortune in bitcoin is built on sand. It is, however, a speculators’ paradise due to the unpredictability and volatility and as can be seen from the graph below, it has made many traders rich, but also poor.

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