Gold is considered the ultimate protection against inflation. Despite the sharp rise in consumer prices, the precious metal is treading on the spot. More and more gold investors are turning away and instead opting for digital gold, Bitcoin. What is the situation about the substitution of gold by Bitcoin and why the silver price can benefit from a strong Bitcoin.
The largest single asset in the world by market capitalization is by far gold ($ 11.3 trillion). Apple and Microsoft only follow suit at around 2.5 trillion US dollars. Most exciting, however, are places seven to nine. Silver, Tesla and Bitcoin are doing a head-to-head race here – flippening in continuous mode. If some Bitcoin enthusiasts have their way, Bitcoin will win one place after the other over the next few years and ultimately even knock the shiny precious metal gold from its throne.
Despite continuously increasing amounts of money, this also means that gold-Bitcoin flippening requires a redistribution between the assets. Such magnitudes of capital shifts are only at the expense of the individual asset. Gold fans are already grumbling that Bitcoin can claim potential gold inflows – at the expense of the gold price.
Gold performance more than weak
Of course, a wide variety of factors have an impact on precious metal prices and the industry with its mining companies. The crypto market is just one new factor among many. So it would be fatal to limit yourself to just this one. Still, it makes sense to include the new factor and consider how it will affect the sector.
The performance of gold is likely to be more than disappointing for the vast majority of investors. Despite the current record inflation, the gold price has not even risen by one percent over the year. Even over the past ten years, one has not even been able to secure one’s purchasing power with the precious metal. An ounce currently costs around 1,750 US dollars – the same as it was ten years ago. Accordingly, it is not surprising that more and more gold investors are switching over to the Bitcoin camp.
Goldman Sachs and JP Morgan see substitution effects
Statements from the major investment banks also suggest that Bitcoin and gold are in a competitive relationship. So called from JP Morgan investment strategist Nikolaos Panigirtzoglou that disappointed gold investors are turning to Bitcoin more and more often. This would also explain the cash outflows in recent months in gold ETFs and cash inflows in Bitcoin funds.
Similar voices can also be heard from Goldman Sachs. There you can also see a massive outperformance of Bitcoin over gold in the next few years. The Head of Energy Research, Damian Courvalin, supports the thesis that Bitcoin will continue to displace the precious metal and expresses in an interview:
Just as we argue that silver is the poor man’s gold, gold may become the poor man’s cryptocurrency.
Damian Courvalin, Head of Energy Research at Goldman Sachs (translated from English into German)
Bitcoin pressures mining companies
Rising production costs due to, among other things, stricter environmental regulations and a further sharp rise in energy prices are increasing the pressure on mine operators. In order to be able to continue to work profitably, a rising gold price would therefore be very important for them. After all, gold is comparatively useless when compared to other precious metals. Just 10 percent of gold production is based on industrial demand. By comparison, industrial demand for silver is around 50 percent – ascending trend, as electromobility and renewable energies are expected to increase the need for silver in the future. While silver, which also functions as an investment metal, can be relatively unaffected by the “crypto conversion”, this is not the case with gold with the primary function of storing value.
Is silver benefiting from gold weakness?
Theoretically, the silver price could even benefit from the Bitcoin strength or gold weakness. After all, there is only very few pure silver mines. Rather, silver is a by-product in the extraction of industrial metals and gold too. If the silver supply also falls due to low gold demand, as the mine operators reduce their production volume, this could have a very positive effect on the silver price due to the supply shortage. Finally, unlike gold, the demand for silver is unlikely to be revised downwards in the future.
Of course, one could also argue that mining companies are trying to compensate for their lack of income from gold production with higher silver production, which in turn would counteract a rising silver price. However, this is hardly economically feasible at current prices. The silver market is far too small and the margin is far too low in terms of costs for gold mines to offset their business with silver mining – at least at current prices.
Conclusion: gold vs. bitcoin
Bitcoin will never completely replace gold, but it can definitely weaken its market position. The shiny precious metal will certainly continue to be able to serve to maintain purchasing power in the long term, but the relative performance compared to assets with similar properties is likely to decline further. While asset management companies and states or central banks already have an established stock of gold, this is not yet the case with Bitcoin.
The inflow of big money from institutional investors is still ahead of BTC in the next few years. And who knows, if the regulation of the crypto sector continues like this, then one day not only the small state of El Salvador could park its currency reserves in Bitcoin, but also central banks of economically more relevant economies. As far as this may seem at the moment, gold should then, at the latest, have serious concerns about its position as the largest single asset in this world.