Gold Is Better Store of Value Than Bitcoin – Goldman Sachs

Bitcoin Price in USD, Jan - Oct 2017

- Click to enlarge

The latest to weigh in on this question is Goldman Sachs which, in a research note entitled ‘Fear and Wealth’, has concluded that gold is better than bitcoin.

Examining gold and bitcoin against the key characteristics of money, the report concludes that “Precious metals remain a relevant asset class in modern portfolios, despite their lack of yield…They are neither a historic accident or a relic.”

Goldman Sachs looked at four key properties of a long-term store of value – durability, portability, intrinsic value and unit of account – concluding that the reasons why gold was originally adopted remain relevant to today.

They believe as the level of uncertainty increases investors increase their exposure to gold. Fear is the medium to short-term driver of the gold price. The long-term driver, Goldman Sachs believes, is wealth.

The debate of gold versus bitcoin is really a rather tedious one. So rarely do you see any other two assets pitched against one another. Yet those choosing to debate it manage to find common ground between the two, so the debate rages on. Bitcoin’s finite supply and occasional rise on the back of geopolitical tensions has led to such comparisons.

Conversely the debate is relevant as both assets are ones which evoke a strong emotive reaction and raise similar questions about the state of the economy and the investment space. As bitcoin’s market cap increases (heading to $100 billion) it is inevitable that it will continue to grab the attention of the likes of Goldman Sachs and institutional investors. Most recently, Ray Dallio, the world’s biggest fund manager felt the need to point out the bitcoin bubble and how he favoured gold over the cryptocurrency.

The debate is of particular interest this year given bitcoin’s performance. It has climbed from around $1,000 at the start of the year to nearly $6,000. In the same period gold is up 12%.

“Gold wins out over cryptocurrencies in a majority of the key characteristics of money,”

Bitcoin’s role as money is one which is still being established. Many of the problems it faces are down to infrastructure and price volatility.

Goldman Sachs addressed the main characteristics that make a medium of exchange and found gold to outperform bitcoin.

The findings were summarised by Bloomberg:

Durability: While both require expertise for correct long-term storage, gold wins because cryptocurrencies are vulnerable to hacking through online wallets or the user’s computer or smartphone, are subject to regulatory risk, and network and infrastructure risk during a crisis.

Portability: Transferring bullion can be expensive, given its weight, need for a high level of security and high import taxes in some countries, such as India. In contrast, it’s much faster and cheaper to move bitcoins.

Intrinsic value: There’s a limited supply of gold and other precious metals in the Earth’s crust, whereas in the case of cryptocurrencies, it’s easy to create alternatives, meaning there’s effectively no control over supply at a macroeconomic level and no intrinsic value due to rarity.

Unit of account: Gold is better at holding its purchasing power, and has much lower daily volatility. Bitcoin/dollar volatility has averaged almost seven times that of gold in 2017, the bank said.

Daily Volatility Returns, Sep 2011 - Jan 2017

Chart from March 2017 - Click to enlarge

The authors conclude that these factors  “clearly illustrate that Bitcoin as a unit of account and medium of exchange is nowhere near as favourable as it first appears.”

Is gold that immovable?

Goldman Sachs found gold was only at a disadvantage to bitcoin when it came down to portability. This is something that is often cited about gold.

Bullion is often accused of being bulky and therefore dysfunctional as a form of money. However, there are two main factors that are overlooked by those who argue this:

– Size of gold bars and coins relative to value

If you consider that the high income households in the UK are estimated to have around £63,000 (on average) in savings then this would be just 2 kilogram bars of gold. About the size of a smart phone each. Not exactly immovable.

Then consider coins, far more portable and a great way to divide up your gold holdings.

Should you hold gold (either at home or in a vault) then you are rarely under the same requirements to move the gold as you are if you had the equivalent held in a bank. Often banks demand a few days’ notice, or limit the amount of cash you can move in one go. Arguably, less portable than a trusty gold bar.

– Technology

In order to spend bitcoin you are required to be ‘online’. Fantastic for those of us who are able to go anywhere without worrying about connectivity. Not so great for those countries, remote areas or disaster struck places (such as Puerto Rico) that do not find it so easy to just jump online and shift a few bitcoin.

Spending a few gold coins, or even a small gold bar, does not require you to partake in an online transaction. Should you find yourself in a position where you need to spend your gold, a power outage or loss of connection will not be your biggest problem.

Uncertainty and fear: the drivers of gold

There are a number of fears about the direction both the financial and political spheres are heading in. Consider real interest rates issues, debasement, sovereign balance-sheet, geopolitical and other market risks.

The main fear is that no-one knows how bad things will be and so investment decisions are coming down to uncertainty. This is good for gold and its price.

“Stated more simply, we are talking about the drivers of ‘risk-on, risk-off’ behavior in markets…This factor matters so much to gold precisely because it is a safe-haven asset. Accordingly, as uncertainty increases, preferences shift towards having more gold in the portfolio, driving prices higher.”

People like to hold gold because they can balance the uncertainty with the certainty that gold will be accepted regardless of how things pan out. Holders know that they can easily transport and transfer it, in order to make an exchange for goods. They cannot know this with bitcoin, both because of its design and because it has never been tested in such a way.

Gold investors are also exposed to far less uncertainties when it comes to professional storage, something Goldman Sachs does acknowledge:

“While both require expertise for correct long-term storage, gold wins because cryptocurrencies are vulnerable to hacking through online wallets or the user’s computer or smartphone, are subject to regulatory risk, and network and infrastructure risk during a crisis,”

Despite this acknowledgement it is interesting that ‘portability’ is still seen as a negative for gold. This has not restricted gold too much in the past.

Long-term investors are clearly also not too concerned about portability either. Goldman Sachs believes these investors are the key to gold’s long-term performance, thanks to a desire to build and protect their wealth.

Gold and Bitcoin Price, Dec 2016 - Sep 2017

Source: US Funds via Forbes - Click to enlarge