The New Gold

Gold Price: 1980-2000 (Ouch)

The recent rise of Bitcoin (BTC) has brought a new wave of triumphalist propaganda across the internet, along with annoying responses by critics. My view is that BTC is a speculative trading vehicle without any economic significance, and I prefer to look at markets from a value perspective. As such, I see little value in discussing it. However, in addition to wishful thinking from BTC backers, critics of BTC are also falling prey to the assumption that what ought to happen will happen. Although things could go south for the crypto-currency, it is not that deep an insight to argue that BTC has carved out a niche as the new gold -- with certain advantages for speculators.

Gold Fanciers Resilient

I started my non-academic career working for an independent financial research firm in 1998. The firm had pivoted to institutional research from being a typical investment newsletter in the early 1980s, but it still had clients from a base that overlapped other newsletters, many of which were gold fanciers. The rise of the public internet disrupted business models for newsletters, but there was a core industry built around being a fan of free-market economics, precious metals, and predicting an inflation outbreak any minute now.

A focus on gold was somewhat laughable to many of us in the markets that had access to price data. The chart at the top of this article outlines the ugliness of gold price action: it lost value in nominal terms and was absolutely crushed in real terms. Gold was only a "store of value" in the loosest sense of the word: its value had not gone to zero. Of course, relative performance versus stocks and bonds was catastrophic, given that they were in generational bull markets. 

Despite this utter failure as an investment thesis for 20 years, the gold fanciers persevered -- and were rewarded by a renewed bull market that starts just after where I strategically lopped off the time axis.

The takeaway: the industry behind gold was able to survive price weakness for a very long time.

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Disclaimer: This article contains general discussions of economic and financial market trends for a general audience. These are not investment recommendations tailored to the particular needs of an ...

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