Gold vs. Bitcoin: Real Inflation in Gold (1-2%) and its Surprising Supply Economics
Spencer Bogart, an analyst with Blockchain Capital had noted that:
“If we think about the qualities that make gold a respected ‘money’ or store of value, bitcoin is actually superior in many regards.”
Now, gold buffs would surely disagree; and the most prominent reason bring the long established history of gold over centuries. Moreover, the liquidity in Gold globally is large for it to function as a reserve asset.
So why Bitcoin? I think the simple answer to that question is because people like it. To an extend that now it has started competing with ‘gold’, which was a part of the vision it began with.
We see analysis of crypto-markets almost daily in our field. Hence, here I’ve attempt to take a look at the gold market trends. The questions I will be exploring are,
- Global Distribution
- Production and Supply (Inflation)
- Correlation with Bitcoin
Production and Supply of Gold
The production cost of gold is around $1000/ ounce. The price of gold is 50% higher than the production cost at $1550. Nevertheless, one can see than the production cost barely has an effect on the price, it’s the demand that matters.
According to the current price, the estimated total market capitalization of Gold is $12.4 trillion dollars. (Hence, we can stop repeating the rhetoric of the $8 trillion dollar Mcap, it changes with price!)
Gold is primarily used for ornaments (90%) and the rest is utilized in technology. The infrastructure for recycling and processing of gold is established on a global scale.
Chris Burniske, blockchain products lead with ARK Investment Management.
“A well-known characteristic about bitcoin is that it’s on a disinflationary supply schedule. While many people think of gold as being the same, gold is actually a sneakily inflationary asset,”
The total Gold reserve (National Treasuries) as reported by the Gold.org is estimated to be 34.500 metric tons. The cost of each metric ton is over $65 million dollars.
The total supply of Gold is estimated to be around 190,040 tonnes along with an estimated below ground reserve of 54,000 tonnes.
Therefore, out of the total supply above Earth, international reserves in countries hold only about 18.1%. The rest is distributed in the form of jewelry, technology and investment across the individuals and entities.
The US accounts for the largest share of about 23.5%, whereas China has about 5.6% of the global reserves. Germany, Russian Federation, and France has a higher reserve than China. The UK, on the other hand, only has about 0.89%, less than Japan and India.
Another prominent trend is the increase in the reserves since the 2008 crisis. The international reserve of Russian Federation, India and China have increased their reserves considerably since 2008.
The hidden Inflation in Gold
Furthermore, it is evident that there is a huge supply of gold beneath the earth. Plus, the demand for Gold is fulfilled little by mining and usually by recycling. Despite that, the annual supply of gold increased by about 3,400 tonnes in 2018 (about 1.8% of total supply).
Burniske had noted that the global supply of gold has been increasing by 1–2% annually over the last century.
The current inflation in Bitcoin is about 3.9%, double of gold. However, it is designed to reduce significantly ( almost by half) in May 2020. Moreover, the inflation in Bitcoin will reduce to 0.25% by 2032.
Due to its mining economics, it will soon reach a level of deflation; i.e. instead of printing more money, the value of the existing currency should appreciate.
One thing stopping Bitcoin is the small market and comparatively low liquidity.
We see that the liquidity in Bitcoin is very low, basically because of:
(a) the low-time history of holders,
(b) country-specific regulation for Bitcoin and Virtual Currencies, and
(c) low global adoption (relative to other global asset markets).
Nevertheless, the trend is on the rise and Bitcoin seems to be effectively competing with gold as a hedge against the global economy.