Weekly Hard Assets Insights
By David McAlvany
Only Gold Is Gold
The meteoric rise and fall of bitcoin and other cryptocurrencies has gotten a great deal of media attention. Those of us close to precious metals do a lot of thinking about alternative currencies and their role as money. This piece is by no means intended as an exhaustive exploration or analysis of cryptocurrencies, and we cannot possibly go down every rabbit hole in this space. Neither do we plan to go into a detailed history lesson on the monetary nature of precious metals. Instead, our missive today is meant as a reflection upon what money is, why gold is indeed money, and whether or not bitcoin and related currencies can be thought of as money based on the criteria we lay out.
Before we can really explore the idea of cryptocurrencies as money, it is important and useful to step back for a moment and ask ourselves the question, “What is money?” What properties does a particular asset have to have in order for it to be considered money? Wikipedia, as well as your Economics 101 textbook, would define three key elements for the functions of money. It must be a medium of exchange, a unit of account, and a store of value.
So, let’s reflect upon the above, and consider the case for gold and why precious metals have for many thousands of years been suited to serve as money.
Prior to the termination of the Bretton Woods agreement in August of 1971, the United States dollar was linked to gold. Certainly, gold was and still can be a medium of exchange. Although used very rarely in modern society, it can indeed be an intermediary to facilitate the exchange of goods and services.
In terms of it being a unit of account, this is a mechanism by which goods and services can be compared with one another. Anything can be expressed in gold terms as easily as they are expressed in dollar terms. The most interesting question, really, is the one around gold being a store of value. Why a yellow rock? Why not other commodities?
For one, we do not really consume gold, and all of the gold that has ever been mined is still in existence today. While the world supply of produced gold ebbs and flows, production growth has remained relatively constant throughout history at about one to two percent per year. No other commodity has more stable supply.
John Stuart Mill said:
n the whole, no commodities are so little exposed [as gold and silver] to causes of variation. They fluctuate less than almost any other things in their cost of production. And from their durability, the total quantity in existence is at all times so great in proportion to the annual supply, that the effect on value even of a change in the cost of production is not sudden; a very long time being required to diminish materially the quantity in existence, and even to increase it greatly not being a rapid process. Gold and silver, therefore, are more fit than any other commodity to be the subject of engagements for receiving or paying a given quantity at some distant period.
–John Stuart Mill, Principles of Political Economy (1848)
You simply cannot print any more of it, the monetary base is not easily expanded, and therefore linking a currency to gold requires monetary discipline and a commitment to monetary stability. For a more in-depth, thought provoking read on why gold is indeed money, we encourage you to read A Gold Polaris by Jude Wanniski, or, for a more expansive tome, read “Gold: The Once and Future Money by Nathan Lewis.”
The case for cryptocurrencies and bitcoin is interesting when this thought process is applied. While not widely accepted as a medium of exchange, cryptocurrency acceptance is growing. Ownership is stored in a digital ledger, which can sometimes have its own challenges. There are all sorts of stories about lost or missing digital wallets, including a recent one where a man offered the city $70 million dollars to dig up a hard drive loaded with Bitcoin. Some may remember early bitcoin stories of exchange collapses, withdrawal halts, and the subsequent bankruptcy of Mt. Gox, which was at that time handling 70 percent of the world’ bitcoin trades. Gold may be considered by some as a barbarous relic, but if you hold physical gold, the likelihood that you can be defrauded of it in this manner is effectively nil.
Are cryptocurrencies a store of value? There are some similarities with gold, certainly. In both cases, the supply growth is limited, while demand can be highly variable. In that sense, surely it is a challenge to fiat currency, as there is a measure of supply discipline associated with cryptocurrency – specifically with bitcoin, as there are, and will always be, only 21 million bitcoins. However, the extreme price swings in bitcoin limit its appeal as a true store of value. From January 9 to January 11 of this year, so over the course of just two days, bitcoin lost 33 percent of its value. It has since regained some of its losses, but its extreme volatility has us looking askance at crypto as a monetary asset.
As a side note, we think it is fascinating that, at least as of right now, generally accepted accounting principles (GAAP) classifies cryptocurrencies as intangibles rather than cash or cash equivalents – or even a tangible asset. Intangibles are non-monetary assets with no physical substance. However you might feel about global accounting standards, they do not recognize cryptocurrencies as hard assets.
By no means do we wish to rain on the parades of those who appreciate cryptocurrencies as an asset class. Cryptocurrencies operate without any central authority. They have a certain appeal to people who believe that traditional currencies in digital form are subject to too much oversight and scrutiny. Too, their supply growth is far slower than that of Central Bank balance sheets. Ultimately, cryptocurrencies are a compliment to a broadly diversified portfolio. However, they are by no means a replacement for money or the “gold polaris.” Only gold is gold.
Chief Executive Officer