The Truth About Gold
There is a lot of misinformation about gold especially in the cryptocurrency community. The reality is that many tie the future price of gold to inflation. Sadly, this is another concept that is woefully misunderstood within the gold and Bitcoin realms. Either way, we will spell out what happens and what you can expect from the leading precious metal.
The assertion is that money printing is what leads the price of gold higher. Fears of inflation mean that people pour into gold as a hedge against inflation. If that were the case, the price of gold will follow that of the money supply. Did that happen?
Source
If we go back 45 years, we will have enough time to judge the trend.
From 1975 to 1980 the numbers looked as follows:
So far, it holds. A strong case could be made that from the middle of the 1970s to 1980, the rush into gold was tied to the expansion of the money stock. These numbers bear out that many ran to gold as a hedge against inflation. If we recall, that was a serious issue in the 1970s.
We now see a M1 of about $5.7 trillion. If the model of gold rising in response, and keeping pace, it would be over $12,000 an ounce. Obviously, sitting at slightly under $2,000, we are only 1/6th of the way there.
So if it isn't the expansion of money, what is it?
With all things financial, it comes down to trust. Gold is a safety value. People move into it when they start to lose trust. What is it they are losing confidence in?
The Government.
Look at the nations that experienced hyperinflation. What happened? The first thing is the population lost confidence in the government. This happened as the economy tanked and the government was in no position to stop it. Usually there is a lot of corruption which put the trust level down to begin with.
Once things started to go sour, the government, along with the central bank, started to print money. They believed they could inflate the economy back into prosperity. Each time it failed.
People start to hoard their money in real assets in an effort to avoid the local currency. Since it is a national matter in these cases, the money cannot flow outward on an international scale. At the same time, in most instances, there are supply shortages of the goods that people need to survive. This is where the price increase is really felt.
Of course, the destruction of capital formation in these countries is enormous. Depending upon the country, hundreds of billions, if not trillions, are wiped out. In this regard, the money printing is really a drop in the bucket. The central bank cannot print enough to keep up.
If we have a sovereign debt crisis arising in the next couple years, I would expect gold to fare well. The yellow metal most likely is going to benefit from the run up that we will see in commodities in general as things start to get tight with supply chains being interrupted.
As always, the situation in Europe is where I am watching to see what shakes out. That is the one area that was fairly solid but is teetering. If that rolls over, we could see the situation get much worse.
And with a second wave of lockdowns taking place, we are apt to see another leg down.
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Bitcoin will never replace gold as a store of value or a physical asset, but it will definitely overshadow it in every way (except the physical applications part).
I actually think the market for gold will go up when Bitcoin takes over, because people who like Bitcoin also like gold (and the idea of what gold stands for). When wealth in abundant, demand for gold should go up because many more people can afford it. Just my take.
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I see no reason why Bitcoin will not overtake gold as the store of value. We are moving into a more digital world that will eventually will become virtual. The idea of physical wealth is going to die away. Hell, money is already digital, something that was not the case 30 years ago.
I think this is mostly incorrect if the studies are true. They are showing that Millennials prefer BTC to gold by a magnitude of 9 to 1. Gold is mostly a boomer asset while the younger ones prefer BTC. Sure there is some overlap but not enough to compensate.
With $70 trillion expected to go from the boomers to the millennials over the next 15 years, that is going to be a radical shift in how people view assets.
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Gold is one valuable asset I'd love to own. It's only wise to hold onto assets that has potential of appreciating in the near future. However, BTC seems to be doing more than gold in terms of price growth.
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Are you adding in the fact that the people that control the money supply are keeping it held down so we don't lose confidence in their money?
I believe it is the money supply and we are not seeing the whole picture (YET). We are just pawns in the game and don't really know the true numbers or real balance sheets of any central banks or the fed.
I see your point you're trying to make when you run the numbers and it does make sense but is not a trust the government thing till it's too late.
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@taskmaster4450le, At the end of the day Financial Ecosystem hugs Make or Break situation because of Confidence In Value or Lack Of Confidence In Value. Stay blessed.