Gold is often referred to as a safe haven asset, a storage of wealth, of intrinsic value. But are these things actually true? The rate of change of technology has been getting faster and faster. a couple of decades ago investors relied on quarterly company reports, for the past decades we have had access to daily or weekly media reports and now social media has created an atmosphere where market swings can occur from pieces of news released at any time of the day, any day of the week which spread across the globe at the speed of light.
But Gold is easy to understand, it doesn’t change, it has stored value for hundreds of years and will continue to do so right? Wrong.
Assumption 1: Gold’s value comes from its utility.
Gold is used in some industrial processes and the manufacturing of electronics, but so are many other rare earth metals which even come close to the value of gold. To say Gold’s value is derived from its utility is delusional.
Assumption 2: Gold’s value comes from its scarcity.
Yes, gold is scarce, but platinum and palladium are far more scarce, have many industrial use cases and are still cheaper than gold. Not only this but within the next couple of decades the supply of gold will multiply many times over with the dawn of asteroid mining. This might sound like a pipe dream but companies such as SpaceX have demonstrated cheap rocket launches are possible and an asteroid identified by NASA which is within reach is valued at $10,000,000,000,000,000,000. To put that in perspective that is over 1 million times the current value of all the gold in the world. So there is certainly an economic incentive to mine these asteroids. You may think this won’t happen in your lifetime but companies such as ‘Planetary Resources’ and ‘Deep Space’ plan to start asteroid mining as soon as 2023. These companies are backed by big names including Larry Page, CEO of Alphabet (the second most highly valued company in the world after Apple).
Assumption 3: Gold has and always will be seen to have intrinsic value.
We have already stated that the value of gold is not equal to its utility value so where does the value come from? It comes from investor’s belief. It has had value for hundreds of years and will continue to have value right? Let’s take a quick look at that. People under the age of 30 have grown up with digital technology, it has advanced society in many ways: medicine, transportation, communication, entertainment… Technology companies have been the fastest growing in the past decade and that trend is likely to continue. Given the choice between physical gold and digital gold, which do you think they will choose?
Assumption 4: Gold has been a storage of value.
Let’s take a look at the inflation adjusted value of gold over the past 100 years.
If you’d invested in Gold 90 years ago you would have barely quadrupled your money, compared to a 20 fold return with U.S. government bonds and 3,200 fold return with the S&P 500. So the ideal portfolio would be formed of stocks and bonds. But we can actually do better than that.
Let’s compare the value of gold since mid 2011 to Bitcoin over the same time period.
Gold on the left, Bitcoin on the right.
If you only allocated 2% of your portfolio to bitcoin, 70% to the S&P 500 and 28% to bonds you would have made a 114,000% return on investment. If you switched Bitcoin out with gold you would have only made a 70% return (all of that gain due to stocks and bonds. You would make slightly more if you didn’t include gold at all!). Think about that, 2% of your portfolio is a very manageable risk and yet delivers more return on investment over 6 years than you can expect in not just your lifetime, but your children’s and their children’s lifetime.
At this point it seems ridiculous not to invest a small part of your portfolio in cryptocurrencies, but you may still have some qualms.
But digital gold isn’t scarce! you may argue. Wrong, Bitcoin’s supply is set at 21,000,000 units and can never be changed unless everybody in the world who is involved with it agreed to increase the supply (which would destroy the value of what they own).
But Bitcoin doesn’t have any real use! Wrong, Bitcoin and the other cryptocurrencies which use it as their reserve currency look set to revolutionise the world in the same way the internet did, from supply chain management to legal contracts to gambling to ownership as we know it.
But Bitcoin is a ponzi scheme! any point you may try and use to show that Bitcoin is a ponzi scheme applies equally to gold. I fail to see a single advantage for owning Gold over Bitcoin.
But Bitcoin isn’t ‘real’, you can’t hold it in your hands! 90% of all currency isn’t ‘real’ either, yet we use it every day to make purchases. The only case of something being digital mattering is in the case of a complete economic and technological collapse of our society.
What about in the case of economic collapse? I think in the case that civilization collapses the only solid investment is a large gun and lots of canned food.
Legendary investor Warren Buffet sums it up perfectly: “It gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Obviously you want to maintain or grow your wealth, so what can you do? The number one most important thing in investing is educating yourself. This is where we can help. We have written a very easy to follow guide to buying and storing bitcoin.
It was designed for the technologically illeterate in mind so the fact you’re using the internet to read this means you are capable of following the guide. Once you’ve read the guide you can read about how to protect your investment, how to diversify within the asset class and if you’re interested, how it all works and why it is going to change the world.