I keep faith in gold

Jamie Dimon, CEO of JPMorgan Chase, recently had a few words to say about cryptocurrencies.

Bitcoin, he said, is an “exaggerated fraud”; it is a “pebble pet”.

Tell us what you really think, Dimon.

In fact, Dimon seems to share the same opinion about Bitcoin that I and many other economists have always had:

Digital “currency” is not really a currency.

That is, it cannot be used as a medium of exchange – there are very few things that can be purchased directly with Bitcoin – and it is not a stable store of value with future purchasing power. reasonably foreseeable.

So it’s basically useless; as Dimon says, it is a companion stone.

However, a long-standing concern among sophisticated cryptocurrency skeptics is that most of the negative things that can be said about Bitcoin can also be said about gold.

You can’t buy food, or even a house, with gold bars.

And historically, the purchasing power of gold has been very unstable.

Gold has fluctuated between being a good investment and a bad one, but in each case its purchasing power has been very less predictable against the dollar, even during times of inflation.

However, people still hold on to gold.

A century has passed since then John Maynard Keynes characterize the gold standard – and, by implication, the idea that gold is money – as “barbarian relic“.

And he was right.

It turns out, however, that there are, and perhaps always will be, enough financial barbarians to maintain a substantial demand for gold as a store of value, even if it has served no monetary purpose for a long time.

And some analysts have suggested that Bitcoin and other digital currencies will remain valuable even if they don’t become real money because they could take on some of gold’s historic role.

Indeed, in early 2022, a Goldman Sachs analyst predicted exactly that, saying that Bitcoin would take market share away from gold.

Which brings me to this:

It could have happened exactly the opposite?

Everyone knows the problems with cryptocurrencies, which have turned out to go far beyond the lack of a clear reason for their existence.

Even in cases where outright fraud did not occur, there were strong aspects of pump and dump“in everything.

We now know, for example, that just as Peter Thiel was proclaiming “the end of the fiat currency regime” and suggesting that the price of Bitcoin could soar 100-fold, his venture capital fund was selling nearly all of its Bitcoin holdings.

However, I have seen relatively little talk about the recent resistance to old-fashioned gold.

It’s a personal surprise.

After the financial crisis of 2008, the goldbugs they yelled at me all the time, insisting that rising gold prices were a verdict on the Fed’s reckless money printing and a harbinger of imminent hyperinflation.

These days I get harangued about cryptocurrency all the time (the two best ways to generate hate mail are bashing Bitcoin and bashing Elon Musk), but I hardly hear anyone talking about gold.

However, gold should be considered an interesting story.

After all, Bitcoin has lost more than two-thirds of its value since its peak in late 2021, and many highly publicized actions such as (clear throat) Tesla They have fallen out of favor, but gold has held up, with its current price only a few percent off its 2020 peak.

One might be tempted to say that investors buy gold because they fear inflation.

But that didn’t work with Bitcoin, which was also supposed to be an inflation hedge.

And in any case, gold prices do not seem to respond to expected inflation.

Instead, they are typically driven by real interest rates, the inflation-adjusted return on alternative investments.

People didn’t buy gold in the 1970s because inflation was high;

he bought gold because inflation was higher than the yield on US government bonds.

They bought gold again after 2008, even though inflation was still low, because interest rates were at their lowest, which meant the inflation-adjusted bond yield was extremely low, sometimes negative.

But real interest rates have risen sharply since the Federal Reserve began tightening policy to fight inflation.

And rising real rates have helped drive down the prices of many assets, not just Bitcoin and Tesla, but many other tech stocks and memes.

As we have already commented, normally rising yields would reduce the demand for gold.

But it’s holding up.

How come?

I have a hypothesis, and it is just that, although I encourage others to see if there is a way to confirm or disprove it.

There you have it: Cryptocurrency, as I’ve said for a long time, has been fueled by a combination of tech talk and libertarian bullshit.

Well, libertarian stupidity will always be with us.

But investors are losing faith in the hot technology.

They still want their companion stones, but cryptocurrency backlash and scandals are causing some of them to revert to the companion stones with centuries of tradition behind them, i.e. gold, the companion stone of a lifetime.

Does all of this matter?

Not generally.

But I think it’s interesting and offers a welcome break from the grim worries about the debt ceiling.

c.2023 The New York Times Society