When inflation takes off, will gold or bitcoin provide the greatest safe haven?
When central banks finally realise they cannot print endless money FOREVER there may be a very calamitous unravelling. Hyperinflation may render fiat currency worthless pieces of plastic as leading global economies are transformed into a cross between Zimbabwe and the Weimar republic.
When saddled with crippling reparation debts following WW1, the canny Germans set about making their currency all but worthless. They printed so many banknotes that a wheelbarrow of cash was required to purchase a loaf of bread. Life was very tough for ordinary Germans. The savings of the middle class were wiped out. However, the international creditors were repaid with the worthless paper, a new currency was introduced, and Germany came roaring back to life.
In Robert Mugabe’s Zimbabwe, inflation peaked in 2008 at 79 billion percent per month. The regime had long been secretly printing money to fund its military involvement in neighbouring conflicts while the country’s economy simultaneously shrank. At the height of the crisis, Zimbabwean shops were forced to close several times per day so prices could be adjusted for the morning’s inflation. 1 trillion dollar notes were issued and became an investment plaything for foreigners looking for exotic vehicles to gamble on. Many policies have tried and failed to correct the nation’s disastrous economic conditions. At the latest 2020 estimates, Zimbabwe’s inflation is running at a mere 750% per annum.
When currencies rapidly shed their value, the losers are those with their wealth denominated in banknotes. Savings accounts are ravaged. The winners are those holding hard and tradable assets and commodities.
Gold has a history of storing value that stretches back thousands of years. It cannot be counterfeited, is a finite resource, and its extraction and purification is a laborious task. It cannot be printed out of thin air to provide economic ‘stimulus’ by shadowy banking cartels. It has survived the test of time. But gold is boring and heavy. It sits idle in vaults and safes while its price barely fluctuates from one decade to the next. Its derivatives are traded by largely sophisticated investors housed in hedge funds and investment banks. In the race to preserve wealth, gold is a turtle, and Bitcoin is the hare.
Bitcoin is the opposite of gold in many regards. While it is increasingly becoming viewed as a safe vehicle to store wealth, it is popular with the young and hip generation while the older traditional investment crowd largely views bitcoin with tulip-style scepticism. Like gold, bitcoin cannot be printed out of thin air or counterfeited, but its price is attached to a rollercoaster with daily fluctuations that can cause nausea and vomiting. Bitcoin is exciting and scary and might just be the future of money. It can be purchased in seconds and fits neatly on a digital wallet. It can be sent across borders and offers the chance to break out of central planning control. It is popular with libertarians and anarchists. It is yet to be hacked, although a lost password or discarded hard-drive may have you combing through a rubbish dump for the remainder of your earthly days.
The bitcoin rise has been meteoric. It has only been trading since 2009 and presently enjoys a market capitalisation over 1 trillion dollars, or about 1 tenth of gold. To reach parity with gold, bitcoin would need to be trading around $500,000 per coin, based on a relatively stable gold price. Any exodus from gold to its digital rival will hasten the race toward market capitalisation ascendancy.
So where to park our wealth to protect it from the central bankers and their magnificent money-printing machines? It depends on your stage of life and appetite for risk. If you are a young go-getter looking to grab the world by the horns then gold is not your answer. To hold bitcoin you will need to be unafraid of wild swings and undaunted by the possibility of rebuilding your wealth. You should not panic-sell but rather buy the dips. Bitcoin calls for diamond hands, as the Wall Street Bets crowd likes to say.
If you are scared of dizzying fluctuations, scare campaigns, possible government crack-downs, and other fearful outcomes, buy gold now. Thousands of years of history are on your side.
There is a persistent group of old-school economists who are convinced the price of gold is set to explode and deliver returns bitcoiners could only dream of. These die-hards have been repeating this line for decades and have almost become comical in their insistence. They view bitcoin as a Ponzi scheme and will not be dissuaded from this view.
Until the crash, the printers will continue to print and purchase securities across all classes. They cannot stop. Money printing is fun. You type zeros into a computer and ‘money’ appears out of thin air. What a job, hitting the zero key on a computer to create unlimited fake wealth.
This is not financial advice. Invest at your peril.