Is Gold Still Shining?

Is gold a good hedge against inflation – or should you rather bet on Bitcoin? By Benedikt Lechner

Gold has always fascinated people. For thousands of years it has been both a universal means of payment and a store of value. Even now, the metal is considered a hedge against the loss of purchasing power of the euro and dollar.

Never before in history have central banks made such excessive use of their ability to create money out of thin air. As a result, the spectre of inflation has become a real threat to our financial assets. Until now, gold has been a safe haven against such catastrophes, but is that still true?

The gold price has risen enormously since the financial crisis of 2009 and has soared to record highs in the aftermath of the “pandemic”. This could confirm its continuing role as a crisis-proof investment. But there are also a number of factors that prevent me personally from betting on gold.

How Rare is Gold?

Honestly, no one really knows. Estimates of the amount of gold in existence diverge between around 170,000 tonnes and almost 260,000 tonnes shown in this chart.

1 Jewellery ~94,464t, 46%
2 Bars and coins ~45,456t, 22%
3 Central banks ~34,592t, 17%
4 Other ~30,726t, 15%
5 Known gold reserves ~53,000t
Total: 258,238 tonnes

In addition, around 3,000 tonnes are mined annually worldwide, mainly in South Africa, the USA, Russia and Australia.

Gold is being searched for worldwide and it is being found. In 2020, huge deposits were discovered in Siberia and only recently enormous deposits were found in Uganda. In addition, NASA and Elon Musk (who else?) are pursuing serious projects to mine gold on planets and asteroids. The asteroid “Psyche 16” may consist almost entirely of precious metals. Even if this all sounds like science fiction, we must not forget that the amount of gold is only theoretically limited. Nobody knows which deposits still lie undiscovered in the ground or have yet to be tapped.

Gold price 1993 to 2021

In the last 10 years, the annual production of gold has increased by 20 percent. The exploitation of new deposits could drastically increase this amount. So far, the new supply has been absorbed by the market and the increased demand for the metal has driven the price up. The question is whether this trend will continue. The Luxembourg-based think tank ISA expects gold prices to fall in the coming years, despite inflation and the economic crisis. What are the reasons for being sceptical about gold?

Gold is Difficult to Transport

A kilo of gold is not much bigger than a chocolate bar, but it is also worth “only” 60,000 euros. If you have sold one or two properties and want to leave your country, you would have to carry 16 kilos in your luggage.

In addition, there are various reporting requirements and questions at customs. Larger quantities of gold will always be detected at the security check. In most countries, the import is duty and tax free, but there will almost always be questions about the origin of the funds. Good if you still have the receipts. Not so good if you have accumulated your gold over decades and no one knows anymore when which bar was acquired, especially if it was bought with cash.

Since August 2021, banks and traders have to demand proof of origin when buying gold from private investors already for amounts of €2,500. The proof of origin must be presented in the form of a receipt, deed of gift or similar.

Gold production 1900 – 2010

Gold is Difficult to Turn into Money

Gold is difficult to sell if not at regulated gold dealers. I do not advise anyone to buy gold outside of regulated trading centres. There are many very well made counterfeits of bars and coins and they are not easy to identify without expensive equipment.

This fact also affects the value of gold as a medium of exchange in times of crisis. If we think of a dystopian Mad Max scenario, it seems downright naïve to believe that you would get anywhere near fair value for your bars or Krugerrands. If times get really rough, you might be lucky to get away with your life – but without your gold.

As we have already seen during the Corona lockdown, trading centres are closed in times of crisis. In the case of power cuts and marauding mobs on the streets, it will be even more difficult to sell gold. I would rather exchange gold for small dollar notes now, they are more likely to be accepted in critical times.

Gold is Difficult to Store

It is not advisable to store and transport your gold yourself. The problems just described will not stop criminals from stealing your gold. Serious criminals will always find ways to turn it into money.

Unfortunately, storage in a safe deposit box also has its disadvantages. The contents of those boxes are usually not automatically insured. In order for an insurance company to pay compensation, you have to be able to prove how much gold was stored there. This can be difficult even with photos, so it is advisable to have witnesses. I personally would rather not like to have any confidants in such matters.

Thinking pessimistically again, in the event of a bank failure, gold and other valuables may still be your property, but you will not have access to your safe deposit box for a while – just when you most urgently need it. Furthermore, the government may be able to confiscate your private assets, which also speaks against storage at financial institutions.

You will therefore have to store larger amounts of gold with specialised companies. Several of them operate in London, Liechtenstein, Switzerland and Singapore. However, you somehow have to get your gold there, which is risky and quite expensive. And of course, this storage also costs an annual fee.

Who Protects Your Gold from the Government?

“It is dangerous to be right when the government is wrong.” This quote by Voltaire has lost none of its relevance. The history of the last century is full of cautionary examples.

In the USA, the motherland of all democracies, President Roosevelt issued a gold ban in 1933 and obliged citizens to sell their holdings to the government at $24 per ounce. Subsequently, the price of gold was pegged at $35. Violators faced up to 10 years in prison. The ban was lifted only after more than 40 years in 1974!

England banned its citizens from buying gold coins or owning more than four coins in 1966. All remaining pieces were to be delivered to the Bank of England, which needed them to back the pound sterling.

The last two years of “Coronoia” have shown us what governments are capable of. On a rather ridiculous pretext they took away civil liberties, ruined the economy and fuelled inflation. The democratic process was completely undermined due to the lack of an effective opposition.

The really worrying thing is that this insanity was supported by almost all states in the world. What use is a gold depository in London or Singapore if all governments work together? We do not know what the next catastrophe will be.

Recently, it has been enough to hold the wrong passport to lose access to your assets. You didn’t have to be an oligarch or a Putin minion – just being a Russian citizen is enough to freeze your account!

Gold on the Blockchain

Blockchain based gold exists in the form of PAX gold tokens, issued by the New York company PAX. Each of these tokens corresponds to one ounce of gold. The corresponding amount of gold is physically deposited in 400 ounce gold bars at the London-based company Brinks. The token runs on the Ethereum blockchain and can thus be held anonymously in a wallet. It is available via major exchanges such as Binance, FTX and Kraken.

PAX is licensed in the state of New York and thus subject to governmental control. The gold reserve is verified and audited. If the token address is given, the serial number of the LBMA gold bar to which the token is assigned can be requested. If you hold a lot of PAX gold, you can even have the corresponding bar delivered. The only catch is that the bars are 400 ounces, so you would have to invest around 700,000 USD for one bar.

If I believed in gold, I would definitely hold it in the form of tokens on the blockchain. This eliminates practically all the disadvantages I have listed in this article. All that remains is the gold price risk and a certain risk of confiscation at exchanges, since PAX gold cannot yet be traded on decentralised exchanges. As a little treat you can earn around 4% interest if I lend out your PAX tokens via the Gemini Exchange.

For those who believe in classic diversification and want to hold precious metals, this is certainly an alternative worth considering.

Qualities of gold and Bitcoin

Bitcoin Is the Better Gold

I’m more of a Bitcoin believer. We know exactly how many Bitcoins there will ever be: no more than 21 million. We can easily store and transport them. There are no limits and hundreds of lightning fast ways to exchange them. I also don’t have to worry about falling for fake Bitcoins. I believe that more and more people will recognise thes advantages and Bitcoin will continue to rise in value, many times more than gold.

The only thing I don’t know is how governments will deal with Bitcoin if it really gets the adoption it deserves. Governments banned gold ownership several times, so they could do the same with Bitcoin. However, it is much harder to detect and seize Bitcoin, so I doubt that governments can really enforce such a ban.

Benedikt Lechner is a crypto consultant and editor of the blog, where this article has been published first. Translation and editing by Aaron Koenig.