This week Honor Blackman, who played Pussy Galore in Goldfinger, died at 94 years of age. One of the best Bond films and certainly one of the best villains in Auric Goldfinger. Goldfinger’s plan was quite clever, he intended to set off a nuclear device at Fort Knox, thereby contaminating the US gold supply and forcing the price of his own stash upward. In effect, the supply of good gold would drop sharply and price would rise.
Gold is back in fashion today and while many people rush to US treasuries and the US dollar for safety, the sheer scale of the money printing is causing many to believe that the value of the USD must deteriorate, hence gold.
Even as someone running a bitcoin fund, I too own gold. It has stood the test of time as a store of value. If you worried about inflation in the 1970s, you did well, if you bought in 1980, you spent 20 years missing out. Longer term though, it’s reliable, the USD has lost 90% of its value against gold in that time. Indeed, looking at the chart you would think Goldfinger had actually been successful.
So, if you are patient, you might say sit in gold during times of significant money printing. Times like the 1970’s, the last financial crisis and perhaps, now.
Gold has some issues though, depending how you buy it. The most popular methods being via ETFs or by holding physical gold.
Issue 1: Exchange Traded Funds
The issue is, does the ETF actually have the gold? Is it ever audited and when it is, does it solely belong to your ETF? It appears that there is now a shortage of physical gold as banks and investment funds move to secure their own physical supply rather than relying on pooled arrangements. Almost certainly, there will be fraud in this system, there will be more claims on gold than gold in existence. This will not necessarily be bad for the price of gold, it will be very bad for the holders of ETFs that do not have the gold they claim though. Here is Alistair Macleod of goldmoney.com this week, highlighting the problem. (LBMA: The London Bullion Market Association). His concern is that all the gold on which there are claims, simply isn’t there.
Issue 2: Physical Gold
You can avoid all the issues in ETF’s by holding physical gold. To me this is a far better solution, at least you have physical custody. The only problem you will have is assaying the gold. Is the lump of metal actually gold? Assay can be difficult, particularly if you are buying unregulated supply. Incidentally, assaying gold is not trivial, see here.
Issue 3: The Government
Let’s say you get all of this correct, you have one last problem, the government. Mass purchasing of gold can hugely undermine the value of a national currency. So much so that it can lead to bans on holding gold altogether.
In 1933, during the great depression, President Roosevelt issued Executive Order 6102: “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States”. The order was made under the authority of the Trading with the Enemy Act of 1917, as amended by the Emergency Banking Act the previous month.
Some of the language might sound familiar today, “Emergency Banking Act”, “Trading with the enemy” etc. All very Trumpian.
It seems highly unlikely that the Government would now seize people’s gold. In fact is probably has the same likelihood of, say a new plague, or something else rare, like a depression. You know, those things that “never happen”.
Dealing with each issue with gold above, we can see how bitcoin is different.
We do not know the total supply of physical gold, or the total claims on that gold. In bitcoin this issue is easily solved. Hundred’s of thousands of computers around the world continually store the bitcoin ledger. My computer hosts a copy of that ledger (a node) and at any time, I can request current supply. It takes a few minutes to compute since the node must count all the unspent bitcoin’s in all 624,606 blocks to date and add them up. See the image below, this took about 3 minutes to run, 18.3074 million bitcoin is the current supply.You cannot do that with gold, you just don’t know. You certainly cannot do it with fiat money.
Bitcoin excels here. It is not physical. If you can remember your password (or your wallet seed). You can carry your entire wealth around in your head and redeem it when necessary. It cannot be seized from you. Arguably, you could under torture be made to confess your secret password “. The way to avoid this is to use multi-signature wallets, with seed phrases kept in separately located safes. This actually avoids any singe point of “torture failure” and is exactly what we do for the bitcoins in our ListedReserve Funds business.
Assaying bitcoin is easy. It takes seconds if you run a full node. Your node simply rejects anything that isn’t bitcoin. A hugely underrated advantage of bitcoin over gold. It’s assay characteristics are protected by very strong cryptography, they cannot be faked.
Issue 3: the Government
Due to bitcoin being non-physical and being protected by encryption, the government cannot seize them. They have tried, for 10 years. They have tried to hack it and bring it down as has nearly every talented hacker in the world. Decentralised systems exist across countries in multiple locations, they are very hard to disrupt and bitcoin’s continual operation since launch is proof of that.
If you are careless with your bitcoin, you might lose them, but they cannot be physically seized, you can cross borders with them. Carrying your entire wealth in your head is a trivial matter.
In an encouraging sign for capitalism, the First State Bank of Barboursville in West Virginia went broke last week. I’m increasingly suspicious of a system where entire economies can stop, people can no longer service debts and yet banks seem to continue unaffected. Theoretically, they are in the front line, and as in any business, only the fittest banks should survive.
As it turns out though, this bank is rather small. Having $152 million in assets and only four branches, I would suggest limited systemic risk in this case. The town of Barboursville is rather small too, total population 4,185.
Banks are a bit like dominoes when they start to fall though. My favourite for bailout is Deutsche Bank, who would certainly have more people in the mail room than live in Barboursville. Deutsche is currently trading for $5 per share, you could have had them for $133 in 2007. They are either cheap, or bankrupt and when they finally topple life in Europe will get interesting.
Europe’s issues are well documented, particularly those of Spain and Italy. The coronavirus has put real pressure on the European Union as a result. Inside the worst hit countries resentment is brewing, mostly because the feeling is that the EU did nothing to help crisis hit countries. Indeed, they closed the borders on each other and hoarded their own masks and ventilators. The European Union has failed its first non-monetary test since launch. Every crisis until now has been fixable with new money, not so this one. Equipment and people were needed and they didn’t come. Spain and Italy will not forget.
The proposed cure from the Eurocrats? More money, in the form of Coronabonds. In the EU, each country issues its own debt and is responsible for it. Under the Corona plan, the bonds would be jointly secured (meaning everyone would borrow Germany’s credit rating). The Germans, obviously, aren’t that keen.
The EU’s Chief Scientist, Mauro Ferrari, clearly feels the same way. He resigned this week and had this to say about the European Union.
In Europe, it’s over and the people know it. The UK knew it, the Italians and the Spanish now know it too. However, Europe’s politicians and bureaucrats are very highly paid, no pay cuts or lay offs for them. They will spend huge sums to keep their fantasy rolling. The end will not be quick and it will not be cheap.
Below you will see the performance of the Euro against the continuous gold contract since it launched (1999). It has lost over 80% of its value. I would show its performance against bitcoin but it’s hard to graph a 99.9% loss in value.
It’s over, but it will take 10 more years and more crippling devaluation to realise it. If you are European, get out of the Euro. Buy bitcoin.
Doing nothing, as you may be discovering if you are in quarantine, is quite hard. This chart explains the value of doing nothing while holding bitcoin. Note the chart has a log scale and you would expect it to taper in the way it does. So far this year, we are up about 5% in price terms, so the 2020 candle is a bit out of date. All things considered, the performance isn’t bad. However on March 12th, the price dropped (almost 40%) in a cascading liquidation to $3,850 before quickly recovering,
That level of volatility means doing nothing is actually a good strategy. Many people “trade volatility” in traditional markets, it is certainly possibly to enhance returns in that way. In bitcoin, I remain cautious about doing this.
A sophisticated bitcoin hedge fund, known as Adaptive Capital, used volatility and leverage to enhance their returns. They were experts in price analysis and trading and a lot of their modelling and insight was impressive. As a bitcoin fund manager I followed their performance closely, they were up over 500% in January this year. Then, on March 12th they closed. Their leveraged positions were liquidated in the flash crash and they wound up the fund with significant losses.
In bitcoin, be long, be patient and be conservative. That is our strategy and it will continue to pay off.
