Investors typically seek out a financial portfolio that’s offers growth-oriented financial instruments, and safe-haven financial instruments to guard against market volatility. However, in that mix are potentially profitable opportunities when markets go awry. Gold is known as a safe-haven asset. It is a commodity that can be traded in multiple formats, notably ETFs such as GLD, gold stocks such as Goldcorp, physical gold bullion, or gold CFDs.
When geopolitical tensions rise such as the recent spate of provocations by North Korea’s ‘Rocket Man’, traders and investors typically flock to gold over equities. The current price of gold heading into the final week of September is around $1310 per ounce (September 25, 2017). The appreciation in the gold price remains marginal, when compared to the appreciation that we have seen in alternative financial instruments such as Bitcoin. It would be foolhardy to assume that digital currency such as BTC or BCC can be compared to gold, given that it is not a tangible asset. However, closer examination of these two financial instruments reveals some striking similarities.
Performance of Gold and Bitcoin Over Time
For starters, Bitcoin (BTC) and gold are available in finite quantities. The total circulation of Bitcoin will be capped at 21 million units, after which time no further Bitcoin will be available. Likewise, gold resources are limited. There is only so much that can be mined, and mined profitably. Given this scarcity phenomenon, these financial instruments naturally have value. However, it is the demand/supply factor that determines how valuable BTC or Gold will be.
Both gold and Bitcoin are dollar-denominated assets. Currently, gold has a 30-day performance in USD of -1.25%, and a 6-month performance of +3.02%. Over the course of 1 year, gold has depreciated by 3.46% in USD terms. However, the performance of gold bullion varies according to the currency in question. In 2017 for example, gold has appreciated by 12.5% in USD, 1.6% in AUD, 3.4% in CAD, -1.4% in EUR, 7.1% in INR, and 7.4% in JPY. In 2016 (Q1 and Q2), gold was one of the stellar assets, averaging gains of around 20%. While impressive, this pales in comparison to what we have seen with digital currency options of late.
At the start of the year, Bitcoin was priced at $997.69. Fast-forward to mid-2017, the price started rising rapidly towards $5,000 per unit by 1 September, before retreating. In percentage terms, that represents a fivefold increase in BTC’s price. Gold can hardly lay claim to such a phenomenal performance, and it is thanks to the widespread adoption of blockchain technology that Bitcoin now has massive exposure to a global market. Several other important factors need to be taken into consideration, notably full licensing and regulation of Bitcoin in the Philippines and South Korea, and the massive trading volume of Bitcoin in Japan. Driving this sentiment is Rocket Man – North Korea’s rogue dictator.
Banking on Gold?
His ongoing rhetoric against the United States, coupled with physical aggression (detonations of intercontinental ballistic missiles and potential hydrogen bombs) is fuelling anxiety in Asia. As a result, Bitcoin has now assumed a pseudo-safe-haven status as a financial asset. We are seeing traders pulling their funds from fixed-interest-bearing securities like bank accounts, treasuries and equities markets, and adopting a new approach with a new financial class of assets – cryptocurrency.
The fact that digital currency and the blockchain technology that powers it allows for greater anonymity, rapid transactions processing, and near-zero fees is innately attractive. Unlike gold ETFs, gold stocks and gold bullion which are associated with high broker fees, commissions, hidden charges and maintenance costs, BTC trading and investing is currently affordable and lucrative. A caveat is in order: To be on the safe side, it’s important to maintain holdings in gold, since digital currency is subject to additional restrictive regulations such as what recently happened in China.