The world’s interest in cryptocurrency and Bitcoin has grown exponentially in recent years. In fact, many younger and more tech savvy investors and speculators now believe that Bitcoin is the new gold. That just may not be the case at the start of 2022 with so much geopolitical risk over a potential invasion of Ukraine by Russia.
Regardless of which asset you prefer, Collectors Dashboard evaluates gold and silver as hard assets within collectibles. The same is true in regarding Bitcoin and cryptocurrency as digital assets, and ditto for non-fungible tokens (NFTs). Which asset you prefer is up to you and we have no interest nor care in trying to tell you which asset class you should prefer. That said, the current state of the world is making gold and silver more dominant than Bitcoin, cryptocurrency and other digital assets at this point in time.
It is important to evaluate which assets will do better and worse when it comes to geopolitical risk — in this case, that geopolitical risk is war. And it is important to consider that Russia now seems to have China as an ally, which may come into play if the promised harsh sanctions against Russia come to reality if it invades Ukraine. How that plays out can ultimately go many ways.
CRYPTO BANS & ENDORSEMENTS
The crypto world managed to overcome a ban by China in 2021. If there is a war where Ukraine is invaded by Russia, the current thought is that Bitcoin would be treated like a risk-asset very similar to as if it was a stock. Gold has been considered the haven metal during extreme uncertainty, including war, for ages. Literally for ages. And when gold sees its price and demand rise, that usually translates to a big move in the price of silver as well.
Most central banks in the world have not followed El Salvador in the pursuit of making Bitcoin an official currency. If they have purchased cryptocurrency, it has by and large not been reported. Most of the larger nations are already in pursuit of their own central bank digital currencies (CBDC) instead. China is already trying to get its own digital yuan rolled out to its population, albeit in a very slow start. The United Kingdom is exploring their digital pound, and there is recent news that the United States is even exploring its own digital dollar in a process that would likely take years to complete.
As for Russia’s stance on digital assets, its ban of bitcoin and crypto is on-again, off-again, and as of today that appears to be more focused on a digital ruble more than bringing Bitcoin and other cryptocurrencies into the mix. That remains to be seen, and frankly all we can do at this point is use history as a guide to determine that Russia will act in whatever it thinks is in its best interest rather than worrying so much about what its people may want at that time.
The United States and Europe have basically not gone after cryptocurrency (or digital assets) in the same way that China did and even in the same on-again off-again stance that Russia has taken.
GOLD SUPPLY & DEMAND
Where things get touchy for gold and silver is in the supply and demand equation that drive the markets. If demand is more or less the same and the supply drops or there is a lack of new supply then economics dictates that prices will rise. And if gold rises, then shouldn’t silver also?
The website Mining.com represented that global gold mine production was a reported 3,463.7 tonnes in 2019. The United States produced about 200 tonnes in 2019, making it the world’s #4 gold producer. Australia is #3 at about 325 tonnes, but Russia is #2 in the world with 329.5 tonnes. And Russia is also shown to supply 83% of European gold, and the Russian government purchases about two-thirds of the nation’s own production. China is the world’s largest gold producer at 383.2 tonnes and that is about 11% of global mine production. Chinese production had been falling over tighter environmental policies (limiting cyanide use at gold mines).
Now let’s consider where silver is mined in the world. The site Investopedia cites Mexico as the #1 silver producer, followed by Peru as #2 in silver production. But look which nations are next — China was ranked #3 and Russia is ranked #4. The United States ranks at #10. That means that the U.S.’s 980 metric tonnes of silver produced is small compared to the 2,100 metric tonnes produced by Russia and the 3,600 metric tonnes produced by China in 2019.
WHY GOLD MATTERS
Now we have to consider one of the primary reasons that gold is purchased in times of uncertainty. Gold has historically been considered as the ultimate hedge. It is supposed to hedge against the value of a declining currency, and many gold bugs treat gold as the ultimate hedge against inflation. At the start of 2022, inflation is at 40-year highs and we haven’t even seen whether or not armed conflict is going to occur. If war does come, and if the promised sanctions are anywhere as tough as they sound, it seems fair to ecxpect the cost of gasoline, natural gas and other commodities are far more likely to rise than fall.
One of key views issued by The World Gold Council is that gold benefits from diverse sources of demand — as an investment, a reserve asset, jewelry, and a technology component. It is highly liquid, no one’s liability, carries no credit risk, and is scarce, historically preserving its value over time.
BITCOIN PRICE & DEMAND
Bitcoin peaked early last November when it was rapidly approaching the $68,000 level, but in the peak selling pressure in january Bitcoin was briefly back under $35,000. The good news is that Bitcoin was back at $44,000 or so on last look. Still, gold and silver did not see their prices crater by 50% in just over a two-month period. The website CoinMarketCap showed that Bitcoin’s current market cap was about $840 billion.
Again, none of the major central banks in the world have ever admitted to be buyers of Bitcoin and other cryptocurrencies. Many government insiders may have made purchases, and some smaller pensions and entities have made purchases – but not the major central banks themselves.
The most recent minutes from the Federal Reserve’ FOMC meeting in late January contained two notes about the price and influence around digital assets. Many other issues were considerable as well — inflation was mentioned 73 times directly. The term “gold” was only used once and that pertained to warehousing as the first notation:
The staff noted that the market capitalization of crypto-assets had grown significantly over the past decade and had experienced considerable volatility, including sizable declines since late last year.
And the FOMC’s second notation from the minutes:
Some participants saw emerging risks to financial stability associated with the rapid growth in crypto-assets and decentralized finance platforms.
INFLATION & RISING INTEREST RATES
We need to consider heavy inflation and a rapid rise in interest rates in 2022, officially for the first time in years after the Federal Reserve juiced the economy so much. The official rate of U.S. inflation in 2021 was 7.0%, after years of averaging 2.0% or lower inflation.
The CME’s FedWatch Tool indicates that there is currently almost a 100% chance of 25-basis point rate hike in March, with close to a 50/50 chance of a 50-basis point hike in March. And for year-end, there is currently a 31% chance that the Fed will raise rates in a 1.50% to 1.75% range and a 30.3% chance that the Fed will raise rates to a 1.75% to 2.00% range for fed funds.
There is also the endless national debt debate that has to be considered. The U.S. national debt is now $30 trillion, and the Federal Reserve’s balance sheet has ballooned up to almost $9 trillion. With a promise of lowering that balance sheet, this means the Federal Reserve is likely to be in a quantitative tightening phase at the exact same time that it is actually tightening credit by raising interest rates.
THE WORLD’s GOLD
Elsewhere, the current value of the world’s gold based on $1,872 per ounce is shown to be around $11.9 trillion. This value was from CompaniesMarketCap.com and based on the world’s above-ground gold reserves (listed as 197,500 metric tonnes) and was from World Gold Council data.
The World Gold Council also seemed more concerned with inflation and rising interest rates than it did Ukraine and Russia. Its January 2022 commentary said:
Gold’s ability to move meaningfully in either direction will, in the short term, depend on whether investors are more concerned about inflation not cooling off or interest rates increasing more rapidly than expected.
The same was true in in the gold outlook issued in mid-January of 2022:
Near term, the gold price will likely react to real rates in response to the speed at which global central banks tighten monetary policy and their effectiveness in controlling inflation.
It is hard to issue any conclusions about where the price of any asset will head in the future. And again, it’s not our business to tell you which assets (or collectibles) you should or should not buy.
Gold bugs always feel gold is handily undervalued. The Bitcoin crowd may not be as vocal as it was last October and November, but it is not difficult to find people who still tout seeing $100,000 and even $500,000 Bitcoin prices at some point in the future.
Right now, it just feels like normal market conditions are not driving the daily swings in the markets of risk-on and risk-off. That puts the global value of gold and safety assets ahead of risk-on assets. That will not last forever, but that’s the case right now.