All That Glitters is Gold and Bitcoin – Are Central Banks Buying Both? 10

All That Glitters is Gold and Bitcoin – Are Central Banks Buying Both?

Gold is at a six-year high ($1,431), bitcoin at a 15-month high ($11,385).

The backdrop to the rise of both is the rising geopolitical tensions and the cheap money policies of central banks that mean you actually pay to lend money to governments these days.

Bitcoin: a 21st century safe haven asset

There are other factors though that don’t figure in the value proposition for both perceived safe haven assets.

On the bitcoin side of the ledger there is the Facebook effect, among other things, as the realisation builds that regardless of what happens with the project, it has let the cat out of the bag. Where Facebook treads many other corporation will tread too.

On the gold side there is the weakening of the dollar of late as investors look to the US Federal Reserve cutting already historically low interest rates.

The gold price has an inverse relationship to the price of the US dollar.

When the dollar falls the price of gold, which is priced in dollars, rises as you can buy more with your non-dollar money which helps booost demand.

But after cancelling those two factors (Facebook and the dollar exchange rate) out of the equation, we are left with the conclusion that the price of the two is related, and the common denominator is geopolitical and economic uncertainty.

Having said that, there is one other key difference between the two commodities – bitcoin has outperformed gold by a considerable margin.

Investors in gold have seen an 11% gain since 1 January 2019, compared to 212% for bitcoin.

Gold bugs push back against bitcoin comparisons

Gold bugs are pushing back though, by dismissing the notion of a digital gold competitor.

Coming to bitcoin’s defence, as always, is Max Keiser who has long championed the digital currency.

Chairman of SchiffGold, Peter Schiff, says it’s wrong to liken bitcoin to the gold his company sells.

“Both gold and Bitcoin prices have risen recently, causing many to erroneously conclude that the two are rising for the same reason.  But stock and bond prices are also rising.  Bitcoin and stocks are rising as speculative assets, while gold and bonds are rising as safe havens,” says Schiff.

Even if you are doubtful about Keiser’s “end of the world” doomsday scenario for the global economy, he is making a couple of sound points there.

Asset prices – the two biggest of which are bonds and then equities – have seen their prices inflated by the historically novel cheap money policies of the central banks.

It is not an accident that the largest bitcoin market globally is in the US, where fears, rightly or wrongly, about central banks inflating away the value of money, are perhaps highest.

Bitcoin (BTC) and gold’s safety and diversification rationale

Gold and bitcoin are perceived as safe haven plays but not necessarily by the same investors.

However, in some cases it may be a similar type of investor buying in both markets.

The safety and diversification rationale of having a little bit of gold in the portfolio also goes for bitcoin.

Now speculation is beginning to circulate about which central banks will be first to reveal that it has a holding of bitcoin in its digital vault.

Rumours that Russia’s central bank was buying up bitcoin, based on the sounding off from a Russian professor thought to be close to the Putin government, proved wide of the mark.

Institutional buyers are driving this bitcoin bull run and possibly central banks driving the gold bull run.

Given that central banks are by far the largest holders of gold bullion, don’t be surprised when we find out that bitcoin is on the balance sheet of a central bank near you.

After all the governor of the Bank of England said the UK central bank was considering holding some crypto.

And for the little people there are number of gold stablecoins to choose from these days as well if you want some of the hard yellow stuff to go with your virtual digital gold.

Iran launched a gold-backed stablecoin back in February as it seeks to combat US economic sanctions.

Which central banks do you think will start buying bitcoin first, or maybe are already buying? Let us know what you think in the comments below