Store of value assets in the digital age
$ 3,623,000,000,000 – this is the increase in M2 money supply in 2020.
At this time, there should be no surprises as to the effect of printing 23% of total US dollars on commodity markets.
Aluminum topped $ 3,000 per metric ton this week. Carbon steel price action is seeing only moderate relief after what appeared to be an endless spike since August 2020.
Due to constantly changing price increases, some manufacturers are now faced with quotes that expire within 24 hours of issuance. It’s fair to say that the general MetalMiner audience has felt the pain of monetary inflation in one form or another.
Each month MetalMiner hosts a webinar on a specific topic on metals. Explore upcoming webinars and sign up for each on the MetalMiner events page.
Gold as a store of value
While MetalMiner’s expertise is primarily in base metals, we also like to keep a close eye on the broader macroeconomic factors.
Avid readers of our market updates are familiar with occasional articles on oil, tariffs, and precious metals, such as gold.
In times of rapid inflation, gold has always been the primary vehicle among store of value assets for institutional investors – and for good reason.
The physical properties of element 79 make it virtually indestructible. Unlike the dollar, gold also has a high stock-to-flow ratio due to sustained mining activity.
Considering all of this, one has to wonder how gold has remained relatively stable over the past year.
Over the past 15 months, the dollar has lost almost 5%. Meanwhile, gold has barely budged a percent from the June 2020 price and previous all-time highs in 2012.
So what’s the problem here? Is another speculative asset taking market share in gold? Or is it just a market irregularity?
As the title suggests, there is a mysterious trillion dollar elephant in the coin: Bitcoin.
Rise of Bitcoin
Whether through general media guesswork or more targeted education, the “B word” has undoubtedly permeated the minds of investors since the start of the COVID-19 pandemic. A 900% increase over an 18-month period is going to turn heads, one way or another.
The Bitcoin community often uses the term “digital gold” because of the striking similarities in its properties to gold. The parallels in terms such as “mining” are fairly easy to spot.
But what makes them similar in principle?
A brief history of metals as money
When looking at the history of civilizations, money has come in many forms: pearls, salt, cattle, etc.
The main reason all of these failed as money vehicles is largely due to ease of production. For example, if a small settlement used rocks as a form of money, mining stone quarries could dramatically increase supply with minimal effort (i.e. inflation). As stone production was accessible even to ancient civilizations, the value of stone is dramatically devalued with each new quarry founded, similar to the dollar devaluation on every new dollar printed by the Federal Reserve.
Over time, societies have introduced healthier forms of money. In fact, the term “sound silver” derives from the sound gold produced when released from a distance.
When metals became the primary use of money, gold quickly became the global monetary standard because of its fundamental properties. Gold requires considerably more energy and resources to be mined, making new production more difficult than other materials. Gold’s longevity of uniformity also provides assurance that it will not corrode or deteriorate over time. The principles of the scarcity and durability of solid silver are the foundations of what made gold attractive as a store of value asset. This is also why countries have used it as a monetary standard for centuries.
However, in 1971, the United States officially got rid of the gold standard. Thus began the era of non-backed fiat money.
Money in the digital age
The 21st century is what some might call the digital age.
Over the past 10 years, we’ve seen everyday things dematerialize in a digital realm: photos on Instagram, music on Spotify, social interactions on Facebook, video on Netflix, and the power to access and distribute it all at 7 billion people with smartphones and computers.
When Bitcoin was first introduced in 2009, it started out with humble roots with a market cap of just a few hundred dollars.
Today, Bitcoin stores more than $ 1,000 billion in value. It is now accepted as legal tender in the country of El Salvador.
Blockchain, the technology on which Bitcoin is based, presents the idea of the dematerialization of money itself into digital, decentralized and trustless networks.
Over the following weeks, we will candidly explore the similarities and differences between gold and Bitcoin through the six properties of healthy money: durability, portability, uniformity, divisibility, scarcity, and acceptability.
Stay up to date on MetalMiner with weekly updates – no sales pitch. Register now.