Dear Reader,
This week, two dramatically different assets with overlapping financial use cases hit an all-time high in price. Gold hit $4,000 per troy ounce and bitcoin topped $125K. Both bitcoin and gold are considered as a hedge against inflation and volatility, but the latter has been full of controversy, given its history of massive swings.
The narrative underlying the rally of both is the debasement of the US dollar. America is buckling under its humongous fiscal debt and soon it would unravel, goes the theory. The US government is under shutdown currently because senators cannot agree on a spending deal. Trump’s tariffs are supposed to fetch the dollars to fill the coffers, but not everyone is betting on that. The elephant in the room is the colossal US sovereign debt and soon enough America would have to inflate it away.
When one dollar won’t buy the same amount of goods and services in future, it is natural for investors to look for assets that would replace it in their portfolios. When marquee investors such as Ray Dalio of Bridgewater also concur with this narrative, we must sit up and notice. Even more telling is the gold grabbing by central banks. The ultimate monetary authorities are diversifying away from the dollar, and this seems enough for all other investors to turn into gold diggers. After all, if central banks are questioning the dollar’s hegemony, they must know a thing or two.
Gold indeed has a compelling story, one of a bull run that is more than 6,000 years old. But it can shrivel under logical arguments like the one Willem Buiter makes in this Financial Times article, free to read for Moneycontrol Pro subscribers. Gold is no longer central to the monetary system and its practical uses are all but negligible. The yellow metal’s main claim to exponential return is its consumption by individuals as jewellery in the name of tradition and fashion. But gold as an investment reads poor if we account for the cost of extraction. Buiter writes that new gold mined in 2024 was 4,975 tonnes, which was a costly waste of resources. What is fascinating is that central banks store gold in vaults as they write its value on their balance sheets.
“Gold, extracted underground at material cost, was turned into gold bars and then put back underground at additional cost,” Buiter writes. “The only gold production strategy that makes socio-economic sense is to leave it all in the ground.”
This is why some investors are looking hard at bitcoins or cryptocurrencies in general. Deutsche Bank analysts in a report recently said bitcoins could be the modern cornerstone of financial security, what gold is right now. They believe that both gold and bitcoin may likely feature as a key reserve in central bank balance sheets by 2030. As such, the US government has enacted the Genuis Act which is seen as its move to mainstream cryptocurrencies. The US Treasury Secretary Scott Bessent has advocated stablecoins as a source of demand for treasury bonds. Stablecoins are right now a critical link between crypto and non-crypto assets.
So, to see bitcoins or cryptocurrencies as a reserve currency in central bank balance sheets is not a stretch. After all, there are striking similarities between gold and bitcoin.
The bigger question is whether both these assets are currently in a bubble territory in terms of value. Buiter’s arguments make gold look like the biggest loss out there, but there are enough red flags on bitcoin. Robert Armstrong in yesterday’s FT Unhedged newsletter argues that gold is currently a momentum trade. Central bank buying has attracted everyone’s uncle into the gold trade, but the narrative of debasement doesn’t add up as the dollar is now steady and long-term US treasury yields suggest no crisis.
The same can be said for bitcoins. Central banks have already diversified away from the dollar and gold buying may not hit a new high while bitcoin’s future depends on how much the dollar rakes up as losses.
It seems gold and crypto still do not have a compelling story beyond what governs every financial asset: the faster something goes up, the quicker and harder is the fall.
PS: Meanwhile, a scheduled excuse to buy gold is coming up for Indians: the festival of Diwali that begins with Dhanteras. While many would like to buy crypto, there is a long way winding through policy corridors and pillars of tradition to make bitcoin the auspicious purchase.
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