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WGC: Cryptocurrencies aren't an option, yet

The gold price lost more than 1.5% or US$20 last week, just as World Gold Council chief market strategist John Reade was stoically defending the precious metal’s position as the ultimate currency and store of value to an investor audience at the Mining Journal Select conference in London.

Chris Cann

Head of Aspermont Research & Intelligence

Chris Cann
Such a short-term price shift with its accompanying commentary from pundits was of little interest to Reade, who was there to talk about the fundamental qualities of gold that would, and were already, protecting it from irrelevancy against bitcoin and other cryptocurrencies.
 
He began by acknowledging bitcoin had its similarities with gold, though with some caveats.
 
The primary common elements that underlie bitcoin's attraction is it is also independent of government-issued currencies; it's finite (theoretically, at least); and it's secure, inasmuch as gold also has some limits to its security.
 
But other key characteristics necessary to be considered as an alternative to gold left cryptocurrencies short: transaction costs could be high; regulation was limited; there was only a limited product suite (compared to gold that offers ETFs, futures, options etc); it was highly speculative; and saw limited involvement from institutions or the official sector.
 
But the big red flag, Reade said, was the comparison as a store of wealth, which was undermined in cryptocurrencies by their extreme volatility.
 
Showing two separate charts tracking gold and bitcoin pricing back to early 2011 and their one-month volatility over a two-and-a-half-year period, he said the volatility of bitcoin was more aligned with the most volatile of the metal commodity suite, nickel, during its most volatile periods, and volatility levels were 10 times currency. He demonstrated the creation of value then dramatic losses on either side of peak interest in bitcoin late last year. He said bitcoin was, in fact, so volatile some bitcoin conferences had stopped taking it as payment.
 
Reade said the "inherent paradox" of a "public ledger blockchain", or cryptocurrency, being adopted as a fundamental currency was that it needed to be traded quickly, at a low cost and at scale, whereas cryptocurrencies were expensive, restricted and lacked a credible exchange.
 
He said the WGC's investigations were prompted by speculation a drop off in trading volumes for North America gold bars and coins was down to a growing preference for cryptocurrencies, however, the real cause was found to be funds flowing into equities, real estate and trading on the back of the ‘Make America Great Again' concept.
 
Furthermore, there was no evidence on open interest or trading volumes for gold.
Reade said cryptocurrencies had been running on "the oxygen of publicity", though that air was getting thin.
 
He said worldwide searches on Google for bitcoin peaked with the price late last year and had come off markedly since.
 
Blockchain, meanwhile, Reade said had many conceptual applications. However, after its introduction 10 years ago, it was yet to make an impact in the market.
 
While the evidence appeared conclusive, most of the investor audience would have been savvy to the WGC representative ‘talking his own book'. Indeed, session chair and former major chief executive, Tom Albanese, politely commented at the time on the pace of change in the world at the moment and the possibility that, while cryptocurrencies may not make sense today, they may very well evolve in the future.
 
Meanwhile, assuming gold is not displaced, ICBC head of precious metals sales Tom Kendall told the conference there were better times ahead.
 
He said aging baby-boomers were becoming a huge stress on the US economy as they took pensions they promised to themselves years earlier that will need to be funded by current working generations. This phenomenon, combined with a lack of interest in US treasuries, has raised concerns over the ability of the US to service its massive national debt and will in turn weaken the dollar.
 
Furthermore, Kendall said the extended period of deleveraging during the commodity downturn had sewn the seeds for a longer-than-usual upswing for gold.