Is gold being pushed aside by bitcoin?

By Jamal Mecklai

Working from home often turns out to be hugely intense—since the start of the lockdown I must have spoken to more than 300 clients; a lot of learning, and a lot of sharing, particularly since these days everyone is even more open than usual. However, there were periods—the last couple of weeks, for instance—when everybody is caught up with year-end and year-beginning, so I have had a fair amount of free time during which I have been monitoring various charts to see if I can come up with any ideas. As a result, two of my last three columns even included forecasts on the rupee, one of which—a suddenly stronger rupee in the last two weeks of the year—has already come true.

Of course, I still continue to believe that occasional successes in forecasting are what is called in the real world a “sucker punch�—get you to believe you can figure things out and when you really jump in, look out! Anyway, the last few days, I have noticed that the volatility of gold is looking a little peculiar. As the accompanying graphic shows, over forever the historic volatility of gold has moved rather smoothly, hitting alternate peaks and troughs quite regularly, except for a long period between June 2018 and June 2019 when volumes fell below 10%, and it looked like gold had gone out of fashion. Of course, sentiment turned, and it started to climb and, as more and more dollar bears came out of the woodwork, it claimed its place in the sun, even breaching $2,000 an ounce after the pandemic struck.

This sunshine proved to be feeble, and gold came down below that highlighted price, but the increasingly strange shape of the volatility trace seems to suggest that, perhaps, there is something else going on. In parallel, there has been a lot of talk over this period, and particularly in the very recent past, about bitcoin and how it could well edge out gold in the future. Now, over the years, I have often received queries about bitcoin and whether it would make a good investment—my stock answer is that I don’t understand it and you should never invest in something you don’t understand.

But the noise has gotten much louder recently, so I called a friend who used to work with me till about 10 years ago. When he left us, he joined one of the top corporate houses in India and was involved with what would turn out to be the first global trade finance transaction done end-to-end on blockchain with one of the largest global banks. My friend is extremely bright and, perhaps more importantly, is very academic-minded, so he gets deep into any subject that he encounters.

His take was that bitcoin, which is currently the loudest incarnation of blockchain technology, will not last as a transaction currency because legitimate users, despite what many of them may say, appear to have a need for some sort of official Big Daddy monitoring their money to ensure they don’t get taken to the cleaners. His evidence for this was the fact that many bitcoin holders foolishly exposed their private keys to the market in an early bitcoin exchange—rather like a bank locker, a bitcoin account has two keys, one which is public and one which is private to provide security; as a result, there was a huge (first of many) scam(s) as the exchange went under with losses in the tens of millions of dollars. This was several years ago and with the number of bitcoins, and its price, having charged higher, the next collapse/scam will lead to losses in billions.

Now, the reality appears to be that the recent surges in bitcoin price have happened because more and more institutional players have been piling into the market, but to my mind, this is likely to largely be a FOMO play. It is hard to believe that institutional investors who have been so well served—indeed, serviced—by the existing central bank driven system would eagerly jump into a system with no controls and huge risks. As we know, capital is by definition extremely risk-averse—it only jumps in with both feet when the game is tilted in its favour.

The other point my friend made—and which may explain the changes in the gold market—is that there are parallels between bitcoin and gold. Both are the opposite of fiat money—i.e., their value is independent of any controlling authority—and both have a limited stock of supply. So, that is my translation of what I learned, and since I already am almost 100 years old (and don’t have to worry too much about the future), I will close with my opening—don’t invest in anything you don’t completely understand.

(Author is CEO, Mecklai Financial. Views are personal)