After a long season of doldrums, the gold market finally began to show signs of life over the course of last summer. Gold
prices had barely moved from a decade low of around $1,100 at the end of 2015 to $1,300 by early 2019, an anemic annual growth rate of 5% compared with 12% for the S&P 500 index
When gold climbed to $2,000 in the early months of the COVID-19 lockdowns, gold bugs begin to celebrate their redemption and end of the wilderness years. But it was the sound of one hand clapping. Gold stumbled and has languished for months in the $1,700s. The metal has been pronounced dead.
For all those who would say that gold’s ancient reign is over, I’d say you haven’t lived long enough. And neither has bitcoin
a parvenu rival as an alternative currency. Gold is failing to perform today despite widespread evidence of inflation because gold is the perennial risk-off asset. We are still in the euphoric haze of peak risk-on sentiment. Gold is a store of value, the protection against the nightmare of currency debasement that gold bugs fear so much.
On the other hand, bitcoin is undefined as a “scarce digital asset with an unchangeable monetary policy. Bitcoin entered COVID-19 lockdowns at less than $5,000, more than 70% off its peak above $17,000 in December 2017. By the time gold peaked in August 2020, bitcoin had more than doubled to $11,000.
But that was just the beginning. By the end of the year, bitcoin had risen again by 160% to $29,000. It has since doubled to around $60,000.
What explains this remarkable ascent and the divergence with gold?
To answer these questions, we have to look at both external factors (the circumstances and the environment) and internal factors (psychological). This requires making some broad generalizations about the nature of each type of investor.
Let’s start with the internal factors: the beliefs, outlooks, and dispositions of each group, which informs how they respond to the external.
In many ways, bitcoin and gold investors share similar views of the world. Both believe the dollar is at imminent risk of sharp and severe devaluation. Both see very strong inflationary forces, no longer just over the horizon but nearly everywhere around them. Both have very little confidence in the ability or willingness of governments to restrain those inflationary forces. Neither trust big government. In fact, both bitcoin and gold afficionados believe that governments all over the world are actively stoking inflation as a means of indirect taxation and thus the confiscation of private wealth.
In other words, both believe that fiat currencies – cash – are trash. Both see scarcity and limited supply as a key advantage of their preferred investment.
Optimists vs. pessimists
A study on human behavior published in 2016 concluded that 90% of humans can be classified into one of four basic personality types: optimistic, pessimistic, trusting and envious. Bitcoin and gold investors represent the archetype of the optimistic and pessimistic personality, respectively.
Bitcoin investors are optimists because they tend to believe that the world is improving, that humanity is good if guided, and more importantly, that technology is the key to human advancement, progress and improvement. Bitcoin investors are therefore technotopians, optimists who believe that technology and digital networks hold the key to a more perfect life and form of society, and eventually a more perfect species.
They believe that one day death itself may be a controllable variable, an unnecessary software feature. They are extroverted libertarians who dress up as anarchists for cocktail parties. They tend to be younger, which always correlates with optimism, and have been active participants in and beneficiaries of the digital revolution.
Their early won wealth and success tends toward hubris and self-satisfaction. They believe that any problem can be solved with sufficient application of brainpower and technology. They are sapiosexual.
Generally, bitcoin investors are fun. We want to hang out with them on Saturday night.
Gold investors are pessimists because they tend to be more cynical and take a realist approach to the world. They see technology as they see the human condition generally, holding great potential for good but also for evil.
They approach problems and circumstances not as they wish they were but as they find them. They are older, and as such have experienced more of the vicissitudes of life. They have been through bubbles, manias, crashes, hair loss and divorce. They have lived more and suffered more, and are too quick to show you their scars.
Generally, bitcoin investors are fun. Gold bugs are the people we avoid at cocktail parties.
These are the people we avoid at cocktail parties, because they can’t stop talking about fiat currencies and impending doom. Many of them are probably closet Puritans. They are dour, unhappy people who waste perfectly good 10-year equity bull markets by inflicting misery upon themselves and on everyone around them for the eventual satisfaction of a crash, and the joy of being able to say, “I told you so!”
Yet this doesn’t explain why there has been such a divergence in performance. Out of dozens of commodities and financial asset classes, gold has been among the worst performers over the past year. The explanation is simpler than it appears. Fundamentally, gold is a rainy-day hedge against the dollar — really against all fiat currencies — and against bubbles in other asset classes. It has proven over millennia to be inversely correlated with the performance of stock markets, bond markets and fiat currencies in highly inflationary environments.
Bitcoin, while making claims to being an alternative currency and a store of value, is really an alternative asset, not an alternative currency. As such, bitcoin is benefiting from the same macro trends that are driving exorbitant price increases in all other pro-cyclical financial assets in this environment.
For money to be good money, it needs to be a store of value. To be a good store of value, money needs stability. Bitcoin may prove to be an excellent speculative investment in an inflationary asset bubble, but, so long as its roller-coaster volatility continues, it will not be money. Neither humans nor investments can truly prove their worth until they’ve suffered through traumatic crises and come out the better for them. All financial assets are overvalued in this moment.
At some point we will have a dramatic and most likely painful correction in stocks and other financial asset classes. It may only be at that stage when gold finally glitters and bitcoin has the real test of its mettle.