Gold vs BTC

Gold vs Bitcoin and tokenized commodities


InvestAnswers on Youtube has said that there is around 100x the amount of paper gold in circulation compared to the real bullion gold supply. The 'paper' versions merely track the price, offering exposure to volatility rather than genuine custody. The price of gold is heavily suppressed by this and other factors such as price fixing by banks and hence, unlikely to experience any significant upside anytime soon.

Since the turn of the century, however, the price of gold has done an 8x and there are many competing narratives as to why it may be safe to bet on its upside, for those chosen few who think in decades.

Gold value since 2000

With the advent of fractional ownership, there are many routes to gold price exposure. Here I would like to analyze some of the common narratives, as well as give insight into the breadth of methods that provide access to gold price exposure and even yield. Hilariously, the behavior of gold shills is reminiscent of their crypto counterparts.

 

Buy gold, buy all of the gold now!?!

BRICS countries such as Russia and Iran have been teasing their own commodities-backed currency, giving them a non-US dollar medium to trade in. If you've been asleep since the start of 2022, basically the US dollar has been somewhat weaponized. Let's ignore issues of trusting supply audits and all the other lessons history has taught us concerning gold-backed currencies (it's as if they had never heard of Bretton Woods). BRICS nations will have to buy a lot of gold. This should be bullish for gold, right?

Meanwhile, China continues to increase its gold supplies. China has been secretive about its gold purchases. In fact, it may hold far more gold than it is letting on. Have you bought gold yet?

Gold deposits valued at $13 trillion have been found in Uganda. Seriously, what are you waiting for?

Keith Weiner, gold expert and founder of Monetary Metals doubts the credibility of such hype. Keith explains (somewhat more poetically) that considering its vast supply, merely moving gold from one place to another should negligibly impact its price, in relation to BRICS nations stocking up on gold. Keep in mind this is a person that thinks that gold is a good investment - more so than crypto. To use Keith's analogy, "gold is sloshing around in the pool, but this information tells you nothing about the size of the pool," referring to such information as 'factoids,' not untrue, but not possessing the information value people have ascribed to them.

Furthermore, he doubts the credibility of the Uganda gold revelation, noting that even if true, gold in the ground is not the same as mined gold (questioning the quality).

However, it should be noted that gold and BTC Bitcoin differ greatly in their inflation. Currently, no more than 21 million BTC can be minted, whereas more gold could be found, particularly once mankind begins mining asteroids and other planets. But that is a very distant concern even for the extremely paranoid, whereas Bitcoin's current inflation model may affect its prospects on a shorter timescale. With the above price chart in mind, remember that the topic of gold is primarily a long-term narrative.

 

Gold narratives a.k.a. Bitcoin narratives

Can gold be considered an inflation hedge or store of value? These questions have also been asked of Bitcoin. For now, let's only consider post-2008 to enable comparison.

The prevailing idea is that in the current environment of monetary tightening and supposed rampant fiat debasement (more articles to come on this), we should all be rushing to stores of value to protect our hard-earned cash from the effects of eternal inflation. Since the collapse of the Bretton Woods agreement, and the start of irredeemable credits being used as money, gold has mainly been for hoarding. People hold gold waiting for higher prices or the end of the financial system. Again some eery similarities with Bitcoin.

Theoretically, if every paper gold owner tried to buy physical gold, the gold supply would be quickly consumed, the same goes for Bitcoin. However, gold has been in a 20-year bear market due to the unregulated expansion of paper gold derivatives.

Then you have people like Graddhy on Twitter, predicting the US dollar losing its reserve status. He posts a lot of technical analysis (TA) on commodities, anticipating an impending commodities bull run, but such wizardry is beyond my level of expertise, so I can't comment on his interpretations. From experience, TA has a strong psychological basis, who knows he could be right.

It's safe to say that for now gold (physically owned gold that is) carries a greater level of trust but is unlikely to experience the same level of upside as BTC Bitcoin in any time frame.

Even the SEC have begrudgingly admitted that they consider Bitcoin a commodity and not equity.

So is gold really worth your time? I'm also still not sure. Let's have a look at some charts.

 

The Charts

As you might know, since inception the M2 supply has been up only. For the uninitiated, M2 is the supply of cash and cash equivalents, i.e. assets redeemable for cash. The red arrow points towards the effects of the current interest rate hikes, the fastest and most aggressive in the history of the Fed (and this chart).

USM2 1960-present

The next chart shows the price of gold divided by the USM2 money supply (calculated by Tradingview) from 1970 - the present.

Gold price suppression 1970

Over time you would have hedged yourself against the expansion of the money supply but if you had held gold since the 70s you would either have broken even or lost value in terms of dollars.

So gold has somewhat resisted the powers of M2 supply expansion.

Here's my own charting wizardry. Gold appears to have been forming an ascending wedge for over 20 years. This is typically seen as a bearish reversal pattern. This one may take another decade to play out.

XAUUSD ascending wedge

More seriously, in the final chart below you can see that following the 2021 bull market, gold trended down until October 2022. The uptrend lasted until January 2023, and now gold is again trending down. 

XAUUSD 2022-present

I did not show the DXY (dollar index) for the sake of brevity, but if you were to plot this final chart against the DXY, you would see that major price reversals occurring over the last few years have coincided with those of the dollar (as with almost all assets). The price action of gold will likely continue to oppose that of the dollar in the coming years.

It is worth noting that while gold appeared to be 'risk off' for most of 2022, its price decreased by roughly 16%, which was quickly made up for. In the same amount of time, BTC lost roughly 70% of its value and has yet to recover. Gold certainly offers a different risk profile.

 

Bitcoin comparison

Could paper derivatives price suppression also happen to Bitcoin? Think of the Greyscale BTC trust and other price exposure vehicles. These can seem attractive due to the discount they offer, however, you have to deal with a lot of legal BS and you don't really get custody of the underlying assets, or have any assurance that you will get your money (or Bitcoin, or whatever they hold) back if the company goes under. Some would also argue that self-custody is one of the major draws of cryptocurrency. But what do they know. In the words of the infamous Avraham Eisenberg, "ahhhhhh, I'm self-custodyiiiiing!"

CTO Larsson explains in depth why he doesn't trust these services and offers an alternative - if you are really desperate not to hold your own crypto

Blockchain logs also make Bitcoin much easier to audit, you can know where it is and exactly how much of it is kicking around. InvestAnswers recommends that the paper versions of either gold or bitcoin should only be held for short-term speculation. NFA but I definitely agree.

But shills gotta eat right? It's hard to avoid hype regardless of the crowd you find yourself in. When being bombarded by shills, opinion shopping among experts can offer a ladder from the irrational. In the case of investing, be sure that the experts have actually made money themselves.

 

Tokenized spot gold

There are several gold-backed tokens that offer you exposure to the price of gold. They are designed to track the price of gold much like stablecoins with the dollar and each token can be exchanged for its equivalent value in physical gold. This system offers the benefit of being able to own gold without having to pay for gold storage - that's their problem. The supplies of such centralized entities are well audited, but it's always good practice to read the fine print. 

It is also easier to trade tokenized versions of gold, for example, PAXG of Paxos, on centralized (and some decentralized) exchanges.

But there's little more you can currently do with these beyond buy and hold.

 

Other ways to bet on gold - interest on gold?

Beyond their rigorous analysis of Gold's place in an investment portfolio, Monetary Metals offer their own unique product, yield on gold, paid in gold. They achieve this by leasing your gold to companies that use gold productively and charging them a fee to turn the gold into valuable products, for the benefit of all involved.

Their 2023 Gold Outlook Report is well worth a read if all of this speculation has piqued your interest. Here's their video again in case you can't be bothered.

 

Tokenized gold derivatives (and other perpetuals)

For a less volatile asset, leverage trading may seem more attractive, particularly for those trading with smaller bags. Of course, this is not financial advice. In this case, Synthetix has got you covered. While lacking its own defi protocol for anything beyond staking of the SNX token, Synthetix offers its depth of synthetic derivatives liquidity and oracle tracking services to other protocols such as Lyra, Thales and Kwenta.

Kwenta now features leveraged trading (up to 25x) using Synthetix sUSD dollars as collateral, allowing you to trade gold and silver (XAU/USD, XAG/USD) as well as synthetic fiat perpetuals such as GBP, AUD and EUR. Again these low-volatility pairs can make for good long-term price speculation or hedging options due to their heavy dependence on the price of the dollar. To be clear, this is currently on Optimism.

For some historical context, Synthetix fiat products have been available on GNS for some time, the JPY perpetual has seen some big winners. There is much anticipation of the introduction of synthetics on GMX, currently the king and godfather of defi derivatives protocols.

 

Degen gold, commodities and equities on Arbitrum

Poison finance on Arbitrum offers yield farming with gold.

If you are a yield farmer then perhaps this is an attractive option for you. If not then perhaps this option may require taking on more risk than the other methods. In this case, you put up collateral (stables, etc.) to mint synthetic assets (TESLA was recently added), with the protocol paying you in the $POISON token for your troubles. The team are adding in more synthetic assets as well as the ability to short, leverage your positions, etc. 

Just to be clear, yield farmers are (usually) encouraged to dump farmed tokens.

Upon their launch, they were also victims of some FUD (which I cannot find) surrounding a rug pull on a previous project the founders were involved in. But so far the $POISON token has done remarkably well, ballooning 5 - 10x in price, albeit along with everything else of value on the Arbitrum ecosystem. 

 

Tokenized commodities, equities and the future

Su Zhu raises a valid point: in an environment of prolonged economic tightening, crypto will suffer from persistent capital flight, and there are currently no real rates on stablecoins.

Su Zhu commodities Twitter

Tokenized commodities would still have potential under these circumstances, as Su Zhu says, offering a dual investor set of both consumers and investors. This could be beneficial not just for monetary metals but for battery metals (i.e. Lithium) and those from other industries.

I am also anticipating the development of a synthetic commodities market. LandX finance and their defi protocol offer solutions to current issues faced in the crop markets. Using regenerative finance principles, they hope to tackle both population and food shortage crises to:

  • Promote sustainable farming practices such as soil management by bringing financing to remote farmers.
  • Provide these small farmers (defined as those with < 50 hectares of land), who produce 60% of the global food supply with the capital to survive and positively impact sustainability.
  • There is potential to add carbon credits to the equation to further promote sustainable practices.

As suggested by Su Zhu, allowing individual farmers to sell their tokenized crops on the open market, where producers can buy from them directly, while also allowing degens such as ourselves to bid on them, creates a multi-component liquidity soup. They are even offering real yield for liquidity providers. Almost sounds too good to be true. We shall see.

They just finished their testnet so keep an eye on Twitter for updates if you are interested and want to get in early.

Speaking of tokenized carbon credits, there's the Flowcarbon project from WeWork's Adam Neumann. But for all of our sanity, let's not go there.

Uranium is also causing a stir, the narrative here is that the renewable energy motif will backfire. This could be for many reasons, for example, there is not currently enough Lithium for all of the batteries required to replace all gasoline-powered vehicles (pardon me innovation). Or perhaps it will be due to soaring energy costs (already happening), or perhaps people will 'remember' that nuclear power produces no carbon emissions, huge amounts of energy and only a small amount of nuclear waste that can be easily disposed of. Imagine Greta fading all that.

The logical follow-up - tokenized Uranium. Maybe if we imagine it hard enough, it will appear before us.

Either way, here is a good introduction (CTO Larsson Youtube) that discusses this in further detail, as well as some options for how to play this information. See more of his videos on gold and commodities in the resources section.

Finally, it has to be said, providing small fishes access to such opportunities, through defi or otherwise could only be a good thing. Small fishes can spot big trends, and they should be rewarded as such. Democratization of finance (e.g. via asset tokenization, defi asset management and distribution of alpha) offers lofty promises of greater wealth distribution and the exorcism of middlemen. At the very least it could create more accessible markets for us degenerate Lemmings.

 

Conclusions

There are many ways to access gold volatility, many can offer genuine custody via exposure to digital assets backed with real, audited supplies. Others allow you to trade with leverage. Either way, trading gold and other commodities can give you a break from the relentless volatility of cryptocurrency and tech stocks. You can treat this as a medium- to long-term play, as well as a good excuse to broaden your laser-eyed focus to macro narratives and major market fluctuations.

 

Monetary Metals are releasing a report - How Not to Think About Gold. The link contains some highlights, you can also sign up for the email release.

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DrRice
DrRice

Postgraduate degree in science. Crypto, Defi and NFT enthusiast. Proficient in data analysis and summarising complex topics.


Understanding and calculating money metrics
Understanding and calculating money metrics

Money and investing concepts, calculating them, and even some code for those interested.

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