The last few years have seen a boom in blockchain technology, a tidal wave in the FinTech industry. One of the major pivot points was the creation of Bitcoin, and soon afterwards Ethereum. Both of these technologies were extremely fundamental in where we are today with digital assets. Bitcoin introduced the concept of a cryptocurrency (a digital currency) secured by cryptography and protected from double spending. It also introduced the concept of the blockchain, which made it all possible. Ethereum was responsible for upgrading the blockchain into something more ductile and programmable. These two were certainly disruptive technologies.
Something new was created more recently, based on the successes of the above technologies: crypto assets (aka digital assets, aka digitized assets). These are digital tokens which are pegged to the price of a physical asset, which determines their price at any given time.
A few companies, including DinarDirham, have done this very thing with gold. But it’s also been done with oil, mining ore, agricultural products, and industrial chemicals, among others. And the wave keeps moving forward and gaining momentum.
With things going the way they seem to be headed, and more and more companies, banks, and governments hopping onto the crypto band wagon, this brings up a valuable question… what happens to physical commodities if this trend continues? And more specifically: does gold still have a future in the wave of digital assets? The latter is the question we’ll be focussing on today.
Let’s take a look at several different points to consider:
1. As covered, we’ve seen a rise of digital assets over the last few years, and they’re ramping up. More and more startups are creating new asset-backed cryptocurrencies (and non-asset-backed regular cryptocurrencies), more and more establishments are accepting digital currencies such as Bitcoin. And more and more governments and banks are starting to look into regulating cryptocurrencies, incorporating blockchain technology, and even creating their own cryptocurrencies. Could we ever get to a point where people just don’t buy physical gold anymore?
2. Gold still has a long and proven history, which digital assets lack. From ancient Egypt, to the Roman Empire, to the Chinese Dynasties & South American Empires, gold has been recognized as valuable in different places around the world for as long as History has been recorded. Furthermore, gold also has physical properties which digital assets simply cannot duplicate. From jewelry to circuit boards to space helmets, and even physical health benefits, gold has many practical uses that a peace of digital cryptography simply cannot serve. Gold is also hard to find, mine, process, purify, and mint, much more so than cryptocurrencies. Gold has also been used as the national standard of currency or the backing of a currency for several countries throughout the world in history past, and national debts are still often paid for in gold. Additionally, a country’s’ capital wealth is often defined as the amount of physical resources it holds (gold included). Which leads us to #3…
3. Gold is still being amassed by governments and the wealthy around the world today. The People’s Bank of China, for example, reported that it added more than 600 tons of gold bullion to it’s stockpiles from 2009 – 2015. Officially owning 1,658 tons of gold bullion, with some experts believing that it could hold more than 10,000 tons, according to an article by zerohedge.com. Other gold analysts estimate that China has at least 2,000 – 3,000 tons of gold, according to cheatsheet.com, which gives us much of the following information (written Feb. 17th, 2015). Keep in mind, this is what the governments are purchasing and holding, and some to do with mining and natural resources, but not with the holdings of private investors.
- Russia was believed to have had 1,208.2 tonnes of gold back in 2015. They had more than doubled their gold reserves over the last few years prior, and their central bank had bought 77 tons of gold in 2013, and 173 tons in 2014.
- Japan was said to have 765.2 tons of gold back in 2015.
- India was said to have 557.7 tons of gold in 2015. In 2009 alone, they purchased 200 tons of gold. India is the world’s second largest gold consumer. Additionally, India is said to consume more silver than any other country. In 2013 alone, an estimated 5,400 tons of silver was imported to the country, preceded by 1,900 tons in 2012, and 5,049 tons in 2008.
- The Netherlands was said to have 612.5 tons of gold in 2015. However, it is estimated that the majority of this gold is held abroad.
- Switzerland was said to have 1,040 tons of gold in 2015.
- France was said to have 2,435.4 tons of gold in 2015.
- Italy was said to have 2,451.8 tons of gold in 2015, after some suggested previously that it sell some of it’s gold during the eurozone crises to help raise funds and restore confidence.
- Germany was said to have 3,384.2 tons of gold in 2015. In 2013, Bundesbank of Germany, announced that it would repatriate some of it’s foreign gold reserves, with the intention of storing half of it’s gold in the country over the next few years. Making good on it’s announcement, it transferred 35 tons from Paris & 85 tons from New York over to Germany in 2014. From 2013 – 2015, Germany’s central bank had transferred a total of 157 tons of gold to Frankfurt. The Bundesbank made this statement in a press release:
“With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centers abroad within a short space of time.”
- The United States was said to have 8,133.5 tons of gold in 2015, despite having ended the gold standard a few decades before. Though some would question the amount of gold the US actually holds (read about that here and here).
- In addition to the few individual countries mentioned above, global gold demand in 2014 reached an estimated 3,923.7 tons, which was slightly lower (4%) than the year before. Cheatsheet.com (in 2015) continues to say that “Although bar and coin demand fell from the 2013 record, central banks continue to fill their vaults. In fact, central banks around the world purchased 477.2 tonnes of gold in 2014, worth $19.4 billion. That is up 17% from 2013 and represents the second highest year of net purchases in 50 years, trailing only the record haul of 544 tonnes in 2012. Ukraine was the only central bank to significantly decrease gold reserves, selling 19 tonnes.”
As we can see, physical gold is still in high demand.
4. Gold can still be used in worse case crises scenarios. For example: what if at the very least, disaster strikes your local area and all internet linked services/electricity in general is down or hard to come by, and is not available at any place selling food and necessities? And at the very most, what if something happens to the internet and/or electricity on a nationwide or global level? In either scenario, your ATM, bank, and yes your Bitcoin or other cryptocurrency service is either unavailable or useless in your localized situation. Now, unless the person selling food or goods needs something else that they want to barter for, there’s a good possibility they’ll accept precious metals such as gold or silver, or other valuables. Cash would probably also be accepted… unless the currency has crashed or the economy is so wrecked that they don’t see any value in it. Additionally, gold and silver, and some other valuables are in general universally recognized, and would likely be accepted in almost any country or by a person of almost any nationality.
5. Blockchain technology is still susceptible to technical & human errors, future hacking technology, and general threats to the web and computer networks. Blockchain technology is still in it’s early stages, and is (and may always be) susceptible to technical errors and human errors (and even greed), such as code which can be (even temporarily) manipulated and taken advantage of for one’s own purposes, etc. Bugs in the system or unforeseen future scenarios can cause problems. And as the system grows, and even it’s security grows, new ways to hack or manipulate the system will likely grow as well. And finally, as described in #4, cryptocurrencies are subject to attacks to the grid, potentially to natural disasters, etc, and could potentially be lost or at least made unavailable when you need them most.
6. Gold is a physical asset to which a digitized gold assets must be linked. Put simply, if you didn’t have any physical assets or needs or wants for them, then there’d be no foundation for an asset-backed cryptocurrency to begin with.
7. Non-asset-backed digital currencies (regular cryptocurrencies) face all the problems of #5. PLUS…
8. Non-asset-backed digital currencies (regular cryptocurrencies) have no real world value. They are perceived to have value, and in some sense have cryptographic value, transparency value, and so on, and only on those non-physical basis’ are they accepted by anyone.
9. Non-asset-backed digital currencies (regular cryptocurrencies) and their technology could potentially be used to create a New World Order, singular currency. One wherewith tyranny rules, everything you do is monitored, everything you have is delegated to you, and/or nothing you want to do can be done without it’s currency… less freedom, no privacy, total centralized control. This is a concern for many of a potential (and even likely) future scenario, and blockchain technology could be used to make this happen. Of course, it wouldn’t necessarily take a digital currency to accomplish this.
10. That said, digital assets do have some advantages to gold bullion. Such as the fact that you don’t need to carry, store, or insure tons of gold or other physical commodities, you can easily bring your cryptocurrency with you, as it’s on the web, your computer or smart device, or even on a small hardware or paper wallet, and they can be used to purchase things online, instantly, anywhere, with little to no fees attached. Also, all transactions are recorded for each coin (which may or may not be an advantage).
Given all the points above, as amazing as cryptocurrencies and digitized assets are, the use and hoarding of physical assets (such as gold or silver) by both governments and citizens is unlikely to stop any time soon, and could potentially be a lifesaver in some worst case scenarios.
And with speculations that the dollar could return to gold under US President Donald Trump, or that the BRICS nations could start gold-backed trading, gold doesn’t look like it’s going away.
Hope you enjoyed this week’s article,
Have a wonderful week!
The DinarDirham Team.