By Rudy Fritsch
There is a lot of talk about crypto currencies these days; and a lot of action in the field. Bitcoin has risen to historic highs vs the USD, other crypto currencies are soaring, and it seems like a new crypto is being introduced every day. Does all this remind you of something?
Sure reminds me of something; I hear the sound of a giant bubble being inflated. Just like the sound of the dotcom bubble a few years ago or the sound of the tulip bubble a few centuries ago. Indeed, as I wrote in ‘Bitcoin… Gold with Wings’, there is a sense that Bitcoin is somehow the new Gold; and this sense contributes to the relentlessly rising value of Bitcoin.
Now mind you, Bitcoin is not a tulip bulb; Bitcoin is a medium of exchange, a digital currency, and a gateway to new technology in the form of blockchain; far more than a simple tulip bulb. Nevertheless, it is perfectly clear that Bitcoin is not Gold; Bitcoin has no history of storing value, indeed it is a vehicle of speculation like tulip bulbs were. Still, Bitcoin does take on some of the aspects of Gold.
Mainly, Bitcoin is not manipulated by governments, Bitcoin is not subject to relentless printing, Bitcoin is not bound to a geographic area, and Bitcoin or more precisely cryptos in general offer privacy… nevertheless, no crypro is Gold; any more than any paper promise, certificate, bond, or other IOU even if denominated in Gold units is Gold.
Only physical Gold in the owner’s hand is Gold… period. So, while I suggest that owning Bitcoin and some other cryptos is a great idea, especially as the digital bubble is blowing ever larger, no crypto is a substitute for Gold… or Silver… in hand. This is ancient wisdom; Gold and Silver have been money for thousands of years. Gold and Silver have held value for eons, long before the invention of money in the form of Gold and Silver coins.
Cryptos have only existed for a few years, decades at most. Cryptos have no history of holding value, not even short term… (months; never mind years, decades, centuries). Holding value over the long term is the sine qua non of MONEY! This is the very reason I keep pounding the table on why every sane person should hold Gold and Silver, as insurance against Fiat collapse.
But while Fiat collapse is inevitable, indeed ongoing, nevertheless Fiat is an asset; a diminishing asset, but an asset nevertheless. Mind you, Fiat depreciation is picking up speed; thus ‘Gold Now’. However, we still need Fiat to pay our rent or mortgage, to buy food and fuel, to pay taxes (Grrr…) and so forth. Bitcoin and other cryptos are on the way to becoming usable in daily trade, but they are not there yet.
Therefore Fiat is necessary, and any method that leads to Fiat income is welcome. Indeed, the only way we can afford to trade Fiat for Money is by earning more Fiat than we need for essentials.
So we come down to it; after all, Aristotle himself said ‘Gold does not beget Gold’… and the enemies of Gold constantly remind us that ‘Gold brings no interest’… so while Gold is fine to maintain wealth, it’s not so fine to create it… right? If you have wealth, it’s OK to own Gold, but if you want to attain wealth, not so much. Hmm, I wonder.
Some simple arithmetic should resolve this question; does Gold create wealth, or not? For arguments sake, let’s assume you have a Gold coin in your pocket or purse; and you take no risk with the coin but simply keep it there. Clearly no interest is earned… but the purchase power or relative value of the Gold coin holds up.
Contrariwise, assume you have Fiat paper in your pocket or purse; and you take no risk with the paper but simply keep it there. Clearly no interest is earned… but the purchase power or relative value of the paper falls with monetary debasement. If ‘inflation’ is 5% yearly, then Gold coin gains 5% in PP vs. Fiat.
The Gold coin wins.
Now assume you take a risk, and place the paper into a bank account to earn interest (risk of bail in, confiscation, account freeze, wealth tax, income tax and so forth). Now your paper does earn interest; or does it? It did in the past, but today we have Zirp (zero interest policy) and Nirp (negative interest policy). Any interest earned is strictly nominal.
At best you receive a pittance from your savings account; most important, any interest you earn is less than the rate of inflation. Your paper even though exposed to risk loses value, just a bit slower than if it simply sat in your pocket. If you get 2% return in your savings account, and inflation is 5%, you still lose 3% yearly.
The Gold coin wins again.
But suppose you are not happy with the return on simply holding Gold; after all, inflation is only a few percent a year (for now!) and suppose you are willing to take some risk with your Gold in order to work for higher returns; surely then you must turn to Fiat vehicles… no?
Actually, no; Gold opens the door to higher return plays, no need to go ‘Fiat’. For example, there are Gold futures, Gold options, and Gold mining shares, all vehicles that increase leverage vs physical Gold. Futures and options provide as much leverage as you can bear… and as much risk as you can bear.
Shares of Gold miners also offer leverage on the Fiat price of Gold; a miner has expenses in Fiat, but earnings in Gold. Any increase in the Fiat price of Gold flows directly to the bottom line of the miner, and the market price of the shares will reflect this; historically, shares of gold miners have provided a three to one leverage vs Gold price.
Now far be it for me to suggest that you speculate in Gold futures, or in Gold shares; I am simply pointing out that Gold does provide vehicles for speculation if you are so inclined. Nevertheless, at the end of the day there is no substitute for owning Gold and Silver. As the old adage on surviving hard times says; ‘it’s not how much money you make, it’s how little you lose’. Substitute wealth for ‘money’ and you are dead center on the track of understanding the value of Gold… and Silver.
Rudy J. Fritsch