Meaning | Is Bitcoin replacing gold? Maybe it’s just the opposite.

JPMorgan Chase CEO Jamie Dimon recently had a few things to say about cryptocurrency. Bitcoin, he declared, is a “hyped-up scam”; it is a “pet stone”.

Tell us what you really think, Mr. Dimon.

Actually, Dimon seems to share the same view of Bitcoin that I and many other economists have held all along: The digital “currency” isn’t really a currency. That is, it cannot be used as a medium of exchange – there are very few things you can buy directly with Bitcoin – and it is not a stable store of value with reasonably predictable future purchasing power. So it’s basically useless – as Dimon says, it’s a pet stone.

However, a concern that has long gnawed at sophisticated crypto-skeptics is that most of the negatives that can be said about Bitcoin can also be said about gold. You can’t buy groceries, or even a house, with gold bars. And historically, the purchasing power of gold has been very unstable. Here’s a chart from Macrotrends of the real price of gold – the price divided by the consumer price index – since 1970:

Gold has oscillated between being a wonderful investment and a terrible one, but regardless, its purchasing power has been far less predictable than that of the dollar, even during periods of inflation.

Yet people still have gold. A century has passed since John Maynard Keynes called the gold standard – and thus the idea that gold is money – a “barbaric relic”. And he had a point! However, it turns out that there are, and perhaps always will be, enough financial barbarians out there to maintain a significant demand for gold as a store of value, even if it has served no monetary purpose for a very long time.

And some analysts have suggested that Bitcoin and other digital currencies will remain valuable even if they fail to become real money because they could take on some of gold’s historical role. In fact, in early 2022, a Goldman Sachs analyst predicted exactly that, saying Bitcoin would take market share away from gold.

Which brings me to the point of today’s newsletter: Is it possible that just the opposite has happened?

Everyone knows about the problems with crypto, which have proven to go far beyond the fact that there is no clear reason for cryptocurrencies to exist. Even where outright fraud did not take place, there were strong pump-and-dump aspects to it all. We now know, for example, that even when Peter Thiel proclaimed “the end of the fiat currency regime” and suggested that the price of Bitcoin could rise by a factor of 100, his venture capital fund sold almost all of its Bitcoin. inventory.

However, I have seen relatively little talk of the recent resilience of good, old fashioned gold.

This comes as a bit of a personal surprise. In the aftermath of the 2008 financial crisis, gold bugs used to yell at me all the time, insisting that rising gold prices were a judgment on the Fed’s reckless money printing and a harbinger of the coming hyperinflation. These days I get harassed about crypto all the time (the two best ways to generate hate mail are criticizing Bitcoin and criticizing Elon Musk), but I hardly hear anyone talking about gold.

Still, 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 much-hyped stocks like (cough) Tesla have fallen from grace, but gold has hung in there, with today’s price just a few percentage points from its peak in 2020.

You might be tempted to say that investors buy gold because they fear inflation. But that hasn’t worked for Bitcoin, which was also supposed to be an inflation hedge. And in any case, gold prices don’t actually seem to be responding to expected inflation. Instead, what normally drives them is real interest rates: inflation-adjusted returns on alternative investments. People did not buy gold in the 1970s because inflation was high; they bought gold because inflation was higher than the yield on US Treasuries. They bought gold again after 2008, even though inflation remained low, because rock-bottom interest rates meant that inflation-adjusted yields on bonds were extremely low, sometimes negative:

But if you look at the end of the diagram, you see a puzzle. Real interest rates have risen significantly since the Fed began tightening policy to fight inflation. And rising real interest rates have helped push down the prices of many assets – not just Bitcoin and Tesla, but many other tech and meme stocks.

As we have discussed, rising yields will normally reduce the demand for gold. But it hangs in there. Why?

I have a hypothesis – and it is nothing more than that, although I encourage others to see if there is a way to confirm or disprove it. Here it goes: Cryptocurrencies, as I’ve long said, were driven by a combination of technobabble and libertarian derp. Well, libertarian derp will always be with us. But investors are losing faith in fashionable technobabble. They still want their pet rocks, but crypto’s plunges and scandals are prompting some of them to return to pet rocks with centuries of tradition behind them — that is, gold, the pet rock of all time.

Does any of this matter? Mostly not. But I think it’s interesting and provides a welcome break from gloomy worries about the debt ceiling.