Is Bitcoin Really Stealing Demand For Gold? Here Is Goldman's Answer

A few days ago we first showed a chart of a dramatic divergence between the price of gold and bitcoin...

... which together with a recent unscientific poll showing that more Ron Paul followers prefer bitcoin to gold...

...prompted many to wonder if bitcoin - whether it is a commodity, currency, commodity-equity hybrid as some suggest, or simply a bubble as its opponents claim daily - was stealing demand for gold.

In an overnight note, Goldman's global head of commodities Jeffrey Currie answered this question, arguing that despite bitcoin's "explosive upward trajectory" the answer to whether "bitcoin is taking demand from gold” is no, and gives three reasons why there is a lack of substitution by investors from gold into bitcoin:

  • First, the investor pools are vastly different. Gold investors who use ETFs, futures or commodity indices are automatically covered by anti-money laundering (AML) and counter-terrorist financing (CTF) regulations which are already “baked in” to processes in these markets. Even physical trading in jewellery, bars, coins etc. has seen a huge increase in regulatory scrutiny, globally, over the last few decades. In the US, professional jewellers and dealers must have an AML program implemented, and significant cash purchases or precious metal sales require additional reporting to the IRS on a transaction by transaction basis. In contrast, there is still very little clarity on how trading in cryptocurrencies could be made to comply with AML and CTF regulations, even in theory. This creates huge regulatory hurdles for professional investors wishing to enter these markets.
  • Second, as the chart below shows, there has been no discernible outflow of gold from ETFs. Indeed, total known gold ETF holdings recently reached their highest level since mid-2013 (currently up 12% YTD, see Exhibit 8). This is somewhat related to the first point, as mutual funds are the largest holders of gold ETFs, but even accounting for this there is no evidence of a mass exodus from gold.

  • Third, and final, the market characteristics of gold and cryptocurrencies are vastly different Currie claims. In this context, th emarket cap of bitcoin is still just under $300 billion, while the total value of gold is a little over $8 trillion. And while bitcoin has a mathematically certain total supply, and gold has a finite (but less certain) supply in the earth's crust, even a cursory examination shows very different market dynamics according to Currie. As a result, Goldman believes that the composition of demand between bitcoin and gold is the key difference in the recent price action, and specifically, bitcoin is attracting more speculative inflows relative to gold.

Putting all this together, Currie concludes that bitcoin has demonstrated much higher volatility and lower liquidity / price discovery compared to gold.

"The market cap of bitcoin is c.$275 billion versus gold at $8.3 trillion. Even all of the cryptocurrencies combined have a market cap less than $500 billion. While the lack of liquidity and increased volatility may keep bitcoin interesting, it is unlikely to convince investors looking for the kind of diversification and hedging benefits which gold has proven to possess over its long history."

Unless it is successful, of course, in which case there is a little under 20x upside for the crypto sector.

Currie does make a good point in his conclusion: "to deal with the AML and CTF uncertainties surrounding bitcoin, and attract a wider investor pool, custody issues must first be resolved beginning with identifying it as a commodity, fund or security." Here Goldman "firmly believes" that bitcoin is commodity, "as bitcoin has no liability that all securities have by definition. Even a dollar bill is ultimately a liability to the US government."

Which is also why demand for bitcoin is so exponentially greater than demand for a dollar bill.


mily Tue, 12/12/2017 - 07:32 Permalink

"Gold ETF", holdings quoted in millions of toz, is it the weight of paper that these underlying futures contracts certificates being "held" are printed on?

Erek mily Tue, 12/12/2017 - 07:38 Permalink

As it looks to be a product of "The Matrix", BitCoin and cryptos in general, will become a prime contolling factor in the third-party control of your finances and your life. People say all the time how "safe" cryptos are and they can't be hacked, can't be controlled by third parties, etc, etc... This thing has only started. Governments around the world are falling over themselves trying to find ways to "control and tax". The very essence of the desired "cashless society" where every transaction , even a tip in the cup of a beggar, is recorded somewhere. Beware.

In reply to by mily

flapdoodle Erek Tue, 12/12/2017 - 08:01 Permalink

I have no doubt that bitcoin (e.g the BTC flavor) is a psy-op. Have no doubt that the NSA in its spare time is mining BTC prime numbers like crazy with the supercomputers, at least in their spare cycles when they are not actively spying on you.The shadowy beginings of BTC IMHO are a dead giveaway.One of BTC's many goals is for TPTB to divert attention and/or depreciate interest in Gold/Silver/etcThey have enough "virgin BTC" to control the market and take it anywhere they want. In that sense, it will not crash - until they want it to crash.To me it seems like a Darwinian thing. Just before a tsunami strikes the sea recedes and you can gather up all the juicy fishes you want from the exposed sea bottom...

In reply to by Erek

Oracle of Kypseli BandGap Tue, 12/12/2017 - 08:52 Permalink

At least fiat can keep you warm for a little while in the fireplace, but Cryptos! Poof! You check your wallet if you can connect and bingo, there is one left so that your account is active.Caveat emptor. desparate times require desparate actions vis a vis the Fed and .gov all of them in unison. The poof will be swift and deadly.On the other hand, if that happens gold will go the other direction.So to you all techys and cryptophiliacs (sounds kind of dirty) I also have a feeling that I just coined a new word. if you do want to invest in that space, hedge your bets. since you feel that cryptos will have an exponential appreciation for every 1000 dollars buy 300 dollars of cryptos and 700 dollars of gold. If you are right, bitcoins will be say a 20 banger which will give you 6k + 700 for your gold total of 6700If crypto goes to near 0, your gold will be about the same in my estimation 6700Now if you expect to make x30 or x100 on your bitcoins, then you may want to invest a few dollars a week on the mega millions and see what that gets you. 

In reply to by BandGap

Erek Radioactive Ideas Tue, 12/12/2017 - 08:34 Permalink

No. I trashed the car in '74 running a little too hard on the county roads. The engine was scrap but I was able to save the Hookers, the Holly, the Edelbrock induction and the Muncie Rock Crusher. She was great though. I punched out the cylinders and put in 13,5:1 high-dome pistons and achieved 500 HP. That was enough to spin my dad's winter tires off the rims on the first try. Lots of fun!

In reply to by Radioactive Ideas

LawsofPhysics Radioactive Ideas Tue, 12/12/2017 - 08:50 Permalink

Correct.  However, I suspect the bitcoins will soon chase some physical PMs, so miners and PM holders may finally do well.These corrupt fucking bankers and financiers can try and supress true price discovery for a long time but eventually all that stumulus will find a place to go that cannot be control.  Position yourself accordingly. Bitcoin and other cryptos are hinting at the real size of the money printing/creating that has been going far as the ongoing fraud in banking and finance is concerned, if these fuckers want to hang themselves, I say we let them.

In reply to by Radioactive Ideas

HRClinton LawsofPhysics Tue, 12/12/2017 - 11:15 Permalink

Bingo!  As I've posted numerous times, I leveraged my btc appreciation, by converting some into gold.The fiat value of my au already exceeds my initial btc investment by 3x, because I got in >4 years ago and held on to my btc. I plan to increase that factor even more. And all my conversions are private.To put it into an equation...BTC + ALT + PM + Gems + Barter + Collectibles = Decentrized Money of the Parallel Economy. ... where the Parallel Economy is the economy of People who've freed themselves from the (((Owners))) and masters of the Fiat Debt Plantation.Smart people will diversify among these and adjust their positions in each periodically and opportunistically. They will also be cafeful, to not go back to the Plantation, where they will get punished for their "wicked ways".

In reply to by LawsofPhysics

GotGalt LawsofPhysics Tue, 12/12/2017 - 15:42 Permalink

Yes I agree.  This article is a bit flawed, as it's not so much bitcoin is coming from those selling gold but from new money that perhaps would otherwise be flowing *into* gold.  As Ron Paul poll notes, the younger libertarian minded folks out there are deciding to funnel money into crypto instead of gold.  So in that sense, bitcoin is definitely stealing gold's thunder

In reply to by LawsofPhysics

taketheredpill Erek Tue, 12/12/2017 - 08:57 Permalink

 Agree. The weakness is you need to get Fiat into / out of the system (for now).  And any (established) retailers who want to use BTC or any crypto for ecommerce will do what the Government says.So steampunk fantasies are just that.Once Government has their (controlled) system up and running they will alow that to be ETH and BTC in August.  Just play money size.  And kicking myself every day for not buying a handful of lottery ticket blockchain stocks at the same time.Watching blockchain equity and hoping government bumping up against BTC will knock down prices....

In reply to by Erek

overbet Erek Tue, 12/12/2017 - 09:07 Permalink

The fact that the ledger records everything isnt a death blow to anonymity. Public wifi or hackable wifi is easily available. The creation of wallets is freely available. You can create as many free wallets on public wifi as your heart desires. You can run transaction through washers into a one time use disposable wallet.  You are ignoring that most sheep use debit cards now anyway. Most grocery stores require a magnetic card to get a discount or even shop there like Costco or Sams. You pretend like your spending isnt already being tracked without a little effort to avoid it. With crypto you will need to make different efforts that is all. 

In reply to by Erek

Kagemusho Erek Tue, 12/12/2017 - 09:47 Permalink

The cashless society was offered on a silver plate with an engraved invitation, but the intended victims warily ignored it.Attach some juicy bait, like insanely high levels of potential profit, and watch the stampede into the pen. The cacaphony of the feeding masks the sound of the gate slamming shut and the butchers sharpening their knives.The S & L debacle. Junk bonds. The Dot Com Bubble. The Housing Bubble. Bait. Trap. Slaughter. Over and over, again and again. Because people who should know better from reading history...don't.  "It's different, this time!" they shout, oblivious of the fiscal blood that stains the floor beneath their feet, the blood of those who came before them who made the same declaration.Only this time, there's no way to avoid the overwhelming power of government who has better computers than you do and has probably already been hacking the blockchain covertly. Civilian technology trails military/gov tech by 20-30 years, generally. Crypto is cashless by the backdoor. Beware, indeed.

In reply to by Erek

HRClinton Kagemusho Tue, 12/12/2017 - 11:23 Permalink

Using your analogy / metapbor, I saw the Easy Feed long before the Herd did. I also left the Herd-think and their mooing, by quietly going in, getting my fill and leaving.If you think that I'm not rebalancing my cyber gains into other assets (that are also decentralized and discreet), then you are a simpleton.Free is as free does, and debt serf is as debt serf does. Which are you?

In reply to by Kagemusho

natxlaw mily Tue, 12/12/2017 - 07:45 Permalink

Damn skippy! GLD and other criminal paper instruments are taking demand away from actual gold by giving worthless paper (even more worthless than Federal Reserve paper) the value of actual gold in the main market.  Bitcoin takes money away from fake paper gold. If I had bought Bitcoin with ever dollar I had ever put on worthless SLV calls, I would have tens of millions of dollars, that is not an exageration. 

In reply to by mily

DC Beastie Boy Brazen Heist Tue, 12/12/2017 - 08:02 Permalink

LTC is definitely way faster. Something is going on and I’m pretty sure we’ll find out soon. The insiders know, it’ll be the newer bag holders of BTC and especially Tethers that’ll get the news late. LTC went from $300M volume to $6B and rising and with no futures market.

If BTC corrects hard it’ll bring everything down and if traders cannot go to Tethers USDT it’ll be even harder. That’s why the three biggest LTC pairs now are real dollar pairs.

Insiders are moving to LTC, ETH, USD

In reply to by Brazen Heist

DC Beastie Boy Brazen Heist Tue, 12/12/2017 - 08:11 Permalink

I’m sure Bitfinex creating almost a billion $$ in Tethers (USDT) and leveraged 3:1 has had a lot to do with the run up this year. Bitfinex has been the front runner and highest volume all year until Bitmex and GDAX took over which is the seriously dumb money buying up BTC at $17K-$22k along with the Koreans. You could see Bitfinex bust the record shorts and break out every ascending wedge all year long. People say BTC doesn’t follow tradition TA, bullshit. Bitfinex doesn’t and hasn’t and I think this will be the news.

In reply to by Brazen Heist

HRClinton DC Beastie Boy Tue, 12/12/2017 - 11:51 Permalink

If you had the brains, vision and courage to get in early into BTC and LTC, and even did some mining, then you were an early investor -- with a Buy & Hold/HODL strategy, and safe from whatever happens.If, OTOH, you were a Herd-think type (most of ZH, which is a herd in itself), or became aware of BTC and Alts only recently and are afraid of being "Left Behind", then you run a host of risks.(FWIW, I got in "early", ie >4 years ago, and went totally against the ZH mainstream/herd.Which taught me a critical lesson: most ZHers are not that smart or wise, when it comes to investing -- for they sound like one-trick PM ponies.You'd almost think that they are a form of PsyOps, designed to keep us simple and poor.)

In reply to by DC Beastie Boy

Brazen Heist j.darkness Tue, 12/12/2017 - 08:29 Permalink

Do not use IOTA's wallet, it is a fucking joke. Their network is a fucking joke too. Tangled up more like it. It has some serious scalability issues. They don't have enough full nodes to run a proper network and have frequent spamming attacks.IOTA is only good on exchanges. Google "IOTA pending transactions" and see what I mean. Constantly re-attaching transactions manually and hoping for the best is not the stuff of a future payment network.

In reply to by j.darkness

j.darkness tmosley Tue, 12/12/2017 - 10:57 Permalink

Not dissing IOTA but wondering why charlie invited this drama/attention to himeslef. I don't see IOTA and LTC competing in any way, and the former offers a pretty good investment or entry price, even still. I don't think IOTA devs care about speculators, I am sure they are plenty wealthy from early adoption into BTC. They want to produce a great product, individulas are not their clients. Machines are. As it stands, corporations make machines, so they are the proxy client. Individuals can ride the wave though.

In reply to by tmosley

Exponere Mendaces tmosley Tue, 12/12/2017 - 12:29 Permalink

My problem with IOTA is the centralized "coordinator" that they haven't transitioned out of (if ever).And the fact they're trying to implement their own crypto, which is pretty much agreed to be a damn stupid idea - you want open-source vetted algorithms, not some home-grown patchjob that isn't tested fully. thanks, they can keep their bad tech decisions. 

In reply to by tmosley

ItsAllBollocks Tue, 12/12/2017 - 07:38 Permalink

Bitcoin's value is based solely on it being a cryptocurency but similar to a virus, Bitcoin futures has attached the US dollar to the value of cryptocurrencies and enabled cyrptocurrencies to be valued in US dollars. If it were my hard drive, my antivirus would have detected the intrusion and deleted it in seconds but as the price of Bitcoin is now set daily in the City of London (not London city), would that not mean Bitcoin is now owned by the Rothschild family? Think about it.