Gold and Bitcoin Will Outperform All Other Assets
To begin with, let us establish a few facts. The majority of this article will flow on speculative theory sourced from a number of macroeconomists who have spent more time studying and contributing to this field than anyone else. Perhaps a quick introduction for those of you who are not familiar with my writing, or who I am. My particular skill set lies in writing about relevant narratives, compiling a source of ideas and articulating this in an easily digestible way. Additionally, I am a university student who prefers to spend his time being an anon in the crypto/Web3 space writing about anything to do with economics, rather than going outside for fresh air.
Back into the article…
A bold statement has been laid out before your eyes. How can I claim that some assets will outperform others. Firstly, let me lay out a conceivable time frame for yourselves. 5 + years seems suitable to see the relative performance of some assets over others. My foresight suggests that in the nearer term due to Central Bank adoption that gold will in fact outperform fiat, Bitcoin and commodities.
A historical recap as such should be given. Especially if you are familiar with my writing. Why have I become a “Gold Maximalist” over the period of such a short time. Let me take you back to a pivotal moment in the history of the West and that was when the USA was elected to become the global reserve currency of the world, not by voluntary choice to be clear. The US Dollar is the most used currency for global trade, pricing in most hydrocarbons. In simpleton terms, its’ the powerhouse of the world.
Structural unemployment. Structural unemployment refers to those workers who are unemployed due to permanent shifts in how the economy works, often driven by processes like technological change. In lieu with the financial principles of Ricardian equivalence, manufacturing labour shifted into the exportation of financial services. This was complemented by the explosion in the number of business schools cropping up in both urban and rural America. The same can be said of the United Kingdom and to a degree, the EU. The narrative shift has now changed in the West, focusing on capital markets and finance.
On this topic of history, let us discuss gold. The function of gold over a sustained period of thousands of years has meant that central banks and sovereigns appreciate and respect the value of gold. The same cannot be said of Bitcoin. Not yet.
26 February 2022. The West decided to confiscate the reserves of a sovereign nation held in a variety of G10 currencies. The Russian Central Bank lost access to $630 billion worth of reserves. Additionally, various Russian commercial banks were removed from the SWIFT network. Many private banks also off of their own accord decided to stop trading in any capacity with Russia or their businesses. Take JP Morgan and Goldman Sachs as some of these banks that cancelled Russia.
All those large energy exporters in the world have been saving in US dollars for so long. Mainly, this is because prior to China, the USA consumed the most energy out of any nation. It makes sense to therefore save in that native currency in order to avoid price fluctuations when transacting with the USA. Both Russia and China are amongst some of the biggest savers in foreign currency globally, this is important to note especially when considering the implications of SWIFT on China’s geopolitics.
Let us define “SWIFT” before we discuss why it is so important. The SWIFT network is a communications layer that allows messages about credit and debits of fiat currencies to be sent between financial intermediaries. It is collectively owned by many nations but effectively controlled by the US and EU.
Within SWIFT, many countries are able to use the true function of money. Money can be split into two things. The unit of account, and the network on which this token moves. The network is more important than the unit. These digital networks are operated by commercial banks, which are regulated by governments. You might think you have a net worth of $100, but if the bank or government for whatever reason decides you can no longer access the digital network, your net worth becomes $0. Physical gold still rides on the cart and buggy network. That is why governments expend energy to store their gold “savings” locally.
Within this digital network there is one central flaw. The entity in control — the government. As long as savers believe that the ruling government will respect the property rights of foreigners, global trade occurs quite frictionlessly. However, if the ruling party decides to block access to the network to any participants, it begs the question: should you “save” in assets that ride on this centralised, permissioned digital monetary network?
That my dear readers is what occurred on 26/02/22, when assets were taken from Russia. Don’t allow your opinion on the righteousness (or not) of the military action between Russia and Ukraine to detract from the fact that this is the start of the “Asset War” and the first foot was placed by the West. It is fair to say the current PetroDollar / EuroDollar monetary system ended last week with the confiscation of the Russian Central Bank’s fiat currency reserves by the US and EU, and the removal of certain Russian banks from the SWIFT network.
You cannot remove the world’s largest energy producer — and the collateral these commodity resources represent — from the financial system without serious unimagined and unintended consequences.
Remember this, you own nothing, you merely “rent” your net worth both as an individual or sovereign from the entity that operates the centralised, permissioned fiat digital monetary network. Excluding gold, approximately $12 trillion worth of “savings” are held by countries in a small set of fiat currencies. The USD commands the elephant’s share of this amount.
With the removal of Russia’s reserve funds, do countries still want to trust the West?
Even their allies may be perturbed.
Will nations with savings in USD/EUR start to think twice about saving there, if minor/major disputes can lead to financial and economic catastrophes?
Why should any central bank “save” in any Western fiat currency, when their savings can be expropriated arbitrarily and unilaterally by the operators of the digital fiat monetary networks?
Let’s talk now about China. A superpower that is yet to move its’ King sized chess piece on the grand checkerboard of the world. China is one of the largest holders of US government debt, holding $3 to $4 trillion in savings which in their eyes, is now a sitting duck for confiscation by the West at any moment.
This will influence the role that they will play in the global capital markets. Western central banks cannot close the gaping “commodities basis” because their respective sovereigns are the ones driving the sanctions. They will have to deal with the inflationary impacts of the “commodities basis” and try to cool them with rate hikes, but they will not be able to provide the outside spreads and won’t be able to provide balance sheet to close “Russia-non-Russia” spreads. But the PBoC can… …as it “banks for a sovereign who can dance to its own tune”.
The crisis is unfolding. Hopefully, you can now begin to see it more clearly. A crisis of commodities. Commodities are collateral, and collateral is money, and this crisis is about the rising allure of outside money over inside money.
Inside Money are monetary instruments that exist as liabilities on another player’s balance sheet. A government bond is a liability of the sovereign, but an asset in the banking system that trades like cash depending on the credit quality of the issuer.
Outside Money are instruments that are not liabilities on another player’s balance sheet. Gold and Bitcoin are perfect examples.
Regarding the scenario of Russia. What makes sense for China to do is accept a fiat currency for their goods and immediately exchange it for a harder asset. Given gold is the hard money choice for humanity, China and others like it will begin to provide a sizable bid in the physical gold market. China will purchase gold in the spot markets and take delivery in the paper derivatives markets of gold bullion in exchange for Western fiat currencies. This comes back to our thesis that currently gold is much more respected than Bitcoin, having only been around for two decades.
In great speculation, surplus countries will then save in terms of gold and storable commodities. And even those who consider themselves allies of the West are not immune to confiscation if they do not directly control the fiat monetary transfer network in which they accumulate reserves.
But why not Bitcoin? After all, gold is great, but it is difficult to store on an individual level. If you fully accept that direct possession of physical gold is required to ensure you actually own what you think you own, then gold becomes quite cumbersome. Most readers don’t have a vault in a freeport in which to store their yellow pet rocks. Instead, you would like a more transportable hard store of wealth.
Both are hard money, one is analog (gold) one is digital (Bitcoin). If a central bank begins saving exclusively in gold, and global trade imbalances are settled in gold terms, I am fully confident that over time some central banks may tire of shipping gold around the world to pay for things. They would rather conduct a small but rising amount of trade in a digital currency, which would naturally be Bitcoin.
Then, and only then my dear reader will we see the ultimate value accrual of both Bitcoin and Gold. $1M for a Bitcoin (where the value of the USD depreciates) is not too far fetched out of the murky waters we are currently surfing on.
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I love this sentence:
“…you merely “rent” your net worth…”
It’s not different that what a friend told me at a urinal:
“You don’t buy or own beer, you merely rent it.”
This is the most insightful read I have seen this week on Bitcoin and gold. Thank You