Bitcoin Nipping At Gold Demand

April 20, 2018

Supply & Demand
The World Gold Council (WGC), the trade group representing the gold industry, said in its fourth-quarter Gold Demand Trends report that the yellow metal’s global, full-year demand fell by 7% last year. ETF demand in 2017 was one-third of 2016’s pace, although 2016 was the second-highest year on record.

Rhind and Thomas say the people who were interested in bitcoin were drawn to the parabolic price rise, rather than viewing it as having the same risk management role in their portfolio as gold does.

“Almost to the person, they all thought bitcoin was exploding, and they didn’t want to miss ‘the move’ … no one ever mentioned safety to me,” Thomas said.

If investors see similarities between bitcoin and gold, those likely come from the supply viewpoint. The amount of bitcoin is engineered to eventually decline, while gold’s production rate is low. WGC says that approximately 3,200 metric tons of gold annually are mined, on average, adding about 1.7% to the total stock of gold ever mined.

“Bitcoin’s future diminishing growth rate and ultimate finite quantity are clearly attractive attributes, as is gold’s scarcity and marginal annual growth,” WGC said in a research note.

Morgan says that of the gold investors who advocate for bitcoin as a competitor to gold that many point to the cryptocurrency’s status as a decentralized, anonymous currency.

Foster says that the rationale of bitcoin being a competitor to gold doesn’t make sense.

“For centuries, gold has been a safe haven store of wealth. In today’s economy, gold is used as a hedge against systemic financial risk,” he said. “And I don’t see how anybody in their right mind would think bitcoin is any kind of a hedge against financial risk given the volatility, given the fact it’s got a very short history.”

Bitcoin isn’t seen as a store of value by many, Morgan says. When he was a panelist at a resource investment conference last year, the moderator asked panelists where they would invest money they needed in 10 years. All of them, including Morgan, opted for gold over bitcoin.

Foster says that the gold market “has been rather dead lately,” noting the strength in equities and the lack of concern about financial-market risk diluting the need for gold as a safe haven. Geopolitical risk is helping to keep a floor under gold prices around $1,300/ounce.

He thinks gold’s building a base following its bear market that ended in 2015. If the U.S. is in the midst of a late economic cycle—which he says he believes is happening—over the next 12 to 18 months, the stock market could correct, and there may be economic weakness to bring the next recession.

If that’s the case, then “gold is sort of like a market just waiting for a catalyst,” Foster said.

Rhind says all commodities are starting to see a pickup in demand because of the coordinated global growth and a weaker dollar, which is supportive to gold. If there are fears about a stock market sell-off, that could also push buyers into gold for a safe haven.

Rising inflation could help gold, and there’ve been small signs inflation may be picking up after being moribund for years. However, Foster says the yellow metal won’t react to rising prices until it looks like inflation is getting out of control, “but we’re not in that kind of environment; at least, not yet.”


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