Gold versus Crypto: What a Difference a Year Makes

In November 2021, the nearby COMEX gold futures reached a high of $1879.50 per ounce. At the $1795.50 level on December 2, gold was 4.5% lower. Gold closed 2021 at $1830.50 and was only 1.9% in 2022 as of the first Friday of December.

Bitcoin is the leading cryptocurrency that reached a $68,906.48 all-time high in November 2021. The level was nothing short of astonishing, considering Bitcoin traded at five cents per token eleven years earlier in 2010. On December 2, 2022, at the $17,010.80 level, the leading crypto that accounts for 38.3% of the asset class’s total market cap was 75.3% lower than the high. Bitcoin closed 2021 at $46,329.11 and was 63.3% lower in 2022 as of December 2, 2022. The overall market cap peaked at over $3 trillion in November 2022 and was sitting at under the $869 billion level at the end of last week.

While holding gold has been a losing proposition since late 2022, the precious metal did a far better job as a store of value as the leading cryptocurrency. In 1999, the Bank of England viewed gold as a barbarous relic, selling half the UK’s reserves below $300 per ounce. Time will tell if the Bank of England and cryptocurrency devotees have made the same mistake.

Mark Twain once wrote, “the rumors of my demise have been greatly exaggerated.” While many cryptocurrency supporters continue to believe the asset class will prove a far more effective means of exchange than gold, gold’s demise does not seem on the horizon.

Central banks are buying gold

• Central banks bought around 400 tons of gold in Q3, a record high.
• A 300% increase in official sector gold buying from the same period in 2021.
• Turkey, Uzbekistan, and Qatar were the leading known buyers, but China and Russia likely added to reserves.

A gold standard in Russia could start a trend

• Facing sanctions, Russia declared 5,000 rubles were exchangeable for one gram of gold, a return to the gold standard.
• The ruble versus the US dollar exchange rate rose from $0.00757 in March 2022 to $0.015992 on December 2, a 111.3% rise.
• Russia’s “no limits” alliance with China could lead the world’s second-leading economy to consider backing its currency with gold.

A crypto scandal for the ages- The detractors versus the supporters

• Cryptocurrency values plunged since the November 2021 record peaks.
• A series of crypto exchange bankruptcies has shaken the market’s confidence.
• The dust has yet to settle after the latest FTX failure.
• The debate between detractors and supporters has intensified after the FTX bankruptcy.

Regulators and legislators- Regulation or Rejection?

• While the CFTC regulates Bitcoin and Ethereum futures, regulation of the asset class has been at a glacial pace.
• Legislators have warned of systemic risks, but the regulating authorities have yet to progress significantly.
• The lack of progress could be intentional as government agencies root for failure as cryptos operate contrary to the government’s control of the money supply.

Gold is the winner in 2022- What to expect in 2023

• Gold has been the winner in 2022, as the precious metal has held value and cryptocurrencies have plunged.
• Cryptos have a short history as boom-and-bust assets. Gold has been in a bull market since the end of the last century.
• Central bank buying validates gold’s role in the global financial system.
• Expect a continuation of stability in gold and more boom-and-bust price action in the cryptocurrency asset class.
• The risk is always a function of potential rewards- Only invest money you are willing to lose in cryptos, while gold remains a core asset with thousands of years of value history.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!