Bitcoin Nipping At Gold Demand

April 20, 2018

[This article appears in our May 2018 issue of ETF Report.]


For centuries, gold has held a unique role: as a form of currency, a store of value and sometimes a speculative or alternative asset to stocks and bonds. No other asset has managed to retain such an allure over time.

And over the centuries, there have been other pretenders for gold’s throne (salt, florins or ducats, anyone?) but none has survived. The latest potential competitor for gold may be bitcoin, the cryptocurrency created in 2009 as open-source software for a decentralized form of payment.

Last year, when bitcoin prices rose from their 2017 starting value of just under $1,000 to over $19,000 by mid-December, market chatter was that bitcoin was usurping gold’s role as a store of value and alternative to fiat currencies. After all, bitcoin’s price was skyrocketing, while gold was languishing, staying mostly in the $1,200 an ounce range, despite rising geopolitical worries.

That price charts showed a near-inverse relationship between the two—especially starting in the fall—likely added to the speculation that bitcoin was sapping demand from the yellow metal.

The fever surrounding bitcoin has died down—that happens when the price of an asset falls by more than half in a short time period. But questions remain: Is bitcoin a competitor to gold? And what’s the outlook for the precious metal?

Some Say Maybe
Pete Thomas, senior vice president of Zaner Precious Metals, a physical markets broker, says that during last year’s bitcoin price run-up, some of his regular customers who buy gold coins or bars on a monthly basis told him they were opting to buy bitcoin at the time instead. He also heard anecdotally from other precious metals coin brokers that they were seeing bitcoin syphoning demand from gold.

He says one of his firm’s long-time clients, a major global coin dealer, told Thomas he saw demand shifting.

“He told us that 20% of his business was now crypto,” Thomas said. “People were going to a gold broker and swapping crypto out or swapping gold to buy crypto with him. He’s a real numbers guy and really reliable.”

Will Rhind, founder and chief executive officer of GraniteShares, issuer of the GraniteShares Gold Trust (BAR), a physical gold ETF, says that when bitcoin prices were higher, it may have reduced marginal demand for gold, but he doesn’t believe that bitcoin is a “zero-sum game” for gold.

“Certainly there are people who invest or buy both of them, but there’s not a big market share differential between the two,” he noted.



Not Happening
Yet Joe Foster, portfolio manager and strategist for the gold and precious metals strategy at VanEck, which offers the VanEck Vectors Gold Miner ETF (GDX) and the VanEck Vectors Junior Gold Miners ETF (GDXJ), disagreed that investors were substituting bitcoin for gold, saying he never saw any hard evidence that was happening.

“There was no trading data cited. I never even saw an interview of anybody saying that I sold my gold to buy bitcoin,” he said. “To me, it was all just rampant speculation that because bitcoin is going up and gold has more or less been trending sideways, people must be going out of gold and buying bitcoin.”

Foster says there were other reasons why gold languished last year, most notably a rallying stock market.

David Morgan, editor of The Morgan Report, a resource investor newsletter, concurs with Foster. He says from what he saw, silver investors were more likely to want to swap bitcoin for silver than gold investors were. People who trade silver have a higher risk-to-reward profile, Morgan said, adding, “many of them are not as sophisticated as gold investors; they’re looking to get rich quick.”


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