The Gold Cabinet Bitcoin Debate

Contributed by Sani Hamid, Wealth Management Director, Financial Alliance Pte Ltd
(The contributor can be contacted at sanihamid@fa.sg)

The debate on whether bitcoin will replace gold as the premier safe haven/store of value investment looks to be gathering steam. I thought it would be good to share my brief take on this.

Is Bitcoin Putting Pressure on Gold Prices?

There is an ongoing rotational play out of safe havens in general, including gold, into risky assets, including bitcoin, because of better sentiment.

For instance, I personally know of people who are selling some of their gold holdings to put into equities and even bitcoin. As sentiment improves among investors, we should see more flows in this direction as risk adversity fades.

Thus, I don’t think it’s bitcoin per se but a general risk-on sentiment that has put pressure on gold prices. Adding to the pressure on gold is the fact that the US 10-year treasury yields have climbed back above 1.00%, thus narrowing the present negative real interest rate. Gold is negatively correlated to this, i.e., when real interest rates rise, gold goes down.

Should Gold Investors Worry?

No. One simple way of looking at it is: both gold & bitcoin will rise, but much more in the case of the latter.

In my view, it is not because people prefer bitcoin and that it will replace gold, but because it is in the process of price discovery. Imagine a new product being launched into the market.

There is demand but only from 10% of the population because not many people know or understand it. Gradually, as they find out more about it, this demand grows to 20%…30%… and maybe stops at 40%. At that point, the price of this product is in equilibrium where actual demand = actual supply. The thing with bitcoin is that we haven’t reached that equilibrium and that is pushing prices up.

But in my view, it will take a lot more before Bitcoin can take over gold’s reign. As it stands today, Bitcoin’s market capitalisation of around US$600 billion is relatively small when compared to gold’s estimated US$10 trillion.

This is an impediment when it comes to the participation of large institutional players, such as central banks, as this group of investors typically require much larger capitalisation, much more liquid markets and institutional-grade-supporting entities like brokerages, custodians etc.

In summary, it’s very highly unlikely that in a QE money printing world, that 12-24 months from now, we will see that gold is down because people have switched to bitcoin. Instead, it will be more likely that both are up, but bitcoin goes up more because of the price discovery phase I mentioned above.