This post was written with contributions from George Milling-Stanley, Head of Gold Strategy, State Street Global Advisors. It was originally published in March 2018, and has been updated to include more recent data.
Digital currencies are one of the most hotly debated topics that the investment world has discussed in quite some time. Bitcoin, the first of 2,149 different cryptocurrencies, has dominated the discussion and some investors even refer to it as “Gold 2.0.”
To provide perspective on the debate over whether or not bitcoin should be considered the next gold—or if it even has a role in an investment portfolio—I sat down with George Milling-Stanley, Head of Gold Strategy at State Street Global Advisors. George has followed gold for more than 40 years and was part of the team that launched the first gold-backed ETF, giving him in-depth insight on this precious metal.
Here are some takeaways from our conversation about bitcoin vs. gold:
Matthew: What are your thoughts when you hear bitcoin being referred to as Gold 2.0?
George: Throughout my career, many investors have told me one of the main reasons they buy physical bullion is to seek to preserve wealth and pass it on from one generation to another. Gold has been a part of human history for at least 6,000 years, and it has functioned as money since at least 200 BCE in the ancient kingdom of Lydia. Today, gold plays an important role in the international monetary system as a reserve asset in almost all central bank balance sheets.
Bitcoin was the first cryptocurrency developed, and it only emerged on the scene as recently as 2009. Until bitcoin has demonstrated over time that it can effectively transfer and preserve wealth, I don’t think it’s responsible to call it Gold 2.0.
Matthew: Although bitcoin and gold don’t share longevity track records, what do they share?
George: The main similarity is that they’re both units of exchange that are not controlled by central banks. I don’t think it’s a coincidence that bitcoin’s inception started in the aftermath of the Great Recession. That is when some investors started to worry about the future of financial markets due to the unprecedented accommodative monetary decisions made by central banks to prop up global economies.
The other similarity is scarce supply. Bitcoin is engineered to slowly decline to zero growth around the year 2140, where it will reach maximum capacity of 21 million digital coins. Gold doesn’t have a set date or maximum capacity, but on average approximately 3,200 tonnes of gold have been mined every year, adding about 1.7% of the total stock of gold ever mined.1
Matthew: How does bitcoin differ from gold in a portfolio?
George: Bitcoin and the other cryptocurrencies, or cryptos, were originally conceived as a medium of exchange, not specifically as a portfolio investment asset. However, the extraordinary levels of speculative interest cryptos have generated means that few are willing to use them for purchases for fear that the value of the digital currency might jump tomorrow. Conversely, few are interested in accepting them in exchange for goods in case the value of the crypto drops the next day. As such, cryptos are currently largely speculative counter, with no clear function as a medium of exchange.
In my view, cryptos have no role to play in investment portfolios. This is largely due to their exceptional price volatility2 and the absence of a more predictable return stream. In contrast, gold has historically played an important role in many investment portfolios due to numerous unique attributes.
- Gold has historically demonstrated very low correlations with the other assets found in a typical portfolio, providing an important level of diversification.3 When stocks have lost value in the past, gold has often shown a negative relationship with them.
- Since President Nixon severed the final link between gold and money in 1971, gold has delivered returns that are broadly comparable with equities.4 The volatility of the gold price has historically been lower, while cryptos have historically demonstrated volatility levels exponentially greater than that of gold.5
- Gold has a long track record of offering preservation of purchasing power. For example, even during periods of low inflation (less than 2%), gold has returned, on average, 6.6%.6
- Finally, gold has historically tended to rise during stock market pullbacks;7 a strategic allocation may help temper the impact of market volatility and reduce portfolio drawdown.
Matthew: Do similar factors move the price of bitcoin and gold?
George: At a very basic level, the price of every asset is driven by changes in demand and supply. I believe bitcoin and other cryptos have become purely speculative in nature, but gold has multiple roles and purposes that influence its price.
- More than 50% of each year’s final gold consumption—approximately—is in the form of jewelry;8
- Approximately 10% of gold consumption goes toward industrial applications—principally in electronics;9
- Approximately 10% is bought as a monetary asset by emerging market central banks;10 and
- Approximately 25-30% is absorbed by individuals and institutions as a portfolio investment.11
Keeping these uses in mind, the price of gold is also driven by a wide variety of factors, including rates of economic growth, movements in foreign exchange relationships, actual and perceived changes in the rate of inflation, developments in mine production and rates of recycling.
Matthew: How would you summarize your overall stance on the current bitcoin vs. gold debate, and cryptocurrencies in general?
George: Bitcoin’s extremely limited track record does not merit comparison to gold. It is also really hard to see where cryptos could possibly fit into an investment portfolio, given their exceptional volatility, the speculative nature of current purchases, and most central banks around the world have not accepted bitcoin and other crypto currencies as a medium of exchange, due to their lack of central authority.12
I’ve seen no evidence that bitcoin or other cryptos have had any impact on the price of gold or on the gold market as a whole. I don’t expect it to in the future, either. Any comparisons between bitcoin and gold are simply not apples to apples.
Matthew: What are your thoughts on the blockchain technology that underlies the development of cryptocurrencies?
George: Even if I don’t see a future for these cryptos, I do see almost certainly a future for blockchain technology. There are a lot of very smart people right now involved in trying to figure out the optimal use for it; there are even people speculating that the technology could play a useful role in bringing greater transparency to the gold industry. Presently, the focus seems to be on the possibility of transforming gold into a digital asset, tracking the provenance of gold across the supply chain and introducing greater efficiencies into the post-trade settlement process. Such attempts could help to unleash the potential of the blockchain technology.
Matthew: Historically, global investors have perceived gold as a "safe-haven" investment. Does bitcoin show a similar potential?
George: Not likely in the near term; 2018 was a turbulent year for US equities and gold, but it was an even worse year for bitcoin, which experienced its worst yearly performance, -74.33% since inception.13
Practically speaking, bitcoin hasn’t had many opportunities or a very lengthy history in which it could showcase potential “safe-haven” qualities. Looking at Q4’2018, the S&P 500 Index wiped away the positive returns it generated during the first three quarters of the year by pulling back just as much, -19.6%, and ending the year at -4.40%.14 During the same quarter, gold generated a 7.73% return, while bitcoin generated a negative return of -44.69%.15 That said, while bitcoin behaved similarly to equities and other risk assets that experienced declines in Q4’ 2018, it is unlikely that investors will look to bitcoin—or cryptocurrencies in general—as a “safe-haven” investment based on their performance in Q4’2018.
1World Gold Council, “Investment Update: Cryptocurrencies are no substitute for gold,” as of 01/25/2018
2Bloomberg Finance L.P., State Street Global Advisors, as of 05/31/2019. Bitcoin 1-year, 3-year and 5-year volatility is 86.19, 89.63 and 78.20.
3Since 2000, the correlation of gold to stocks, bonds and other commodities was -0.01, 0.28, and 0.44, respectively. Bloomberg Finance L.P., State Street Global Advisors, as of 03/31/2019. Computed using monthly return data from January 2000–March 31, 2019. Correlation measures the degree to which the deviations of one variable from its mean are related to those of a different variable from its respective mean. Stocks represented by S&P 500® Index; Bonds represented by the Bloomberg Barclays U.S. Aggregate Index; Commodities represented by Bloomberg Commodity Index. Index returns reflect all items of income, gain, and loss and the reinvestment of dividends and other income.
4Bloomberg Financial L.P. and State Street Global Advisors. Performance time period: 06/30/1971-03/31/2019. Asset classes are represented by LBMA Gold Price PM (USD/oz) and S&P 500® Index. LBMA Gold Price PM (USD/oz) and S&P 500 appreciated 7.54% and 10.49%, respectively. Past performance is not a guarantee of future results. It is not possible to invest directly in an index. Index performance does not reflect charges and expenses associated with the fund or brokerage commissions associated with buying and selling a fund. Index performance is not meant to represent that of any particular fund.
5Bloomberg Financial L.P. and State Street Global Advisors, as of 05/31/2019. 1-year, 3-year and 5-year volatility for gold and bitcoin are 8.14 and 86.19, 9.63 and 89.63, and 12.36 and 78.2, respectively.
6Bloomberg Finance L.P., and State Street Global Advisors. Computed using average monthly gold returns and US CPI figures from 01/31/1970-03/31/2019.
7Bloomberg Finance L.P., State Street Global Advisors, as of 12/31/2018. Notes: Dot-Com Meltdown: 02/29/2000–03/30/2001 LBMA Gold Price PM (USD/oz) returned -12.2%, MSCI AC World TR returned -20.6% and Bloomberg Barclays US Aggregated Bond Index TR returned 14.0%; September 11 Terrorist Attacks: 08/31/2001–09/28/2001 LBMA Gold Price PM (USD/oz) returned 7.4%, MSCI AC World TR returned -9.1% and Bloomberg Barclays US Aggregated Bond Index TR returned 1.2%; 2002 Recession: 02/28/2002–08/30/2002 LBMA Gold Price PM (USD/oz) returned 5.4%, MSCI AC World TR returned -12.2% and Bloomberg Barclays US Aggregated Bond Index TR returned 4.9%; Global Financial Crisis: 11/30/2007–03/31/2009 LBMA Gold Price PM (USD/oz) returned 17.0%, MSCI AC World TR returned -48.6% and Bloomberg Barclays US Aggregated Bond Index TR returned 5.7%; Sovereign Debt Crisis I: 04/30/2010–08/31/2010 LBMA Gold Price PM (USD/oz) returned 5.7%, MSCI AC World TR returned -8.3% and Bloomberg Barclays US Aggregated Bond Index TR returned 4.8%; Sovereign Debt Crisis II: 02/28/2011–10/31/2011 LBMA Gold Price PM (USD/oz) returned 22.0%, MSCI AC World TR returned -8.1% and Bloomberg Barclays US Aggregated Bond Index TR returned 6.4%; Brexit: 06/22/2016–06/27/2016 LBMA Gold Price PM (USD/ oz) returned 4.7%, MSCI AC World TR returned -5.6% and Bloomberg Barclays US Aggregated Bond Index TR returned 0.91%. Past performance is not a guarantee of future results. Performance above does not reflect charges and expenses associated with the fund or brokerage commissions associated with buying and selling exchange traded funds. Performance above is not meant to represent the performance of any investment product. Performance data above derived from total return indices.
8World Gold Council, Gold Demand Trends, full year and Q4 2018, January 31, 2019.
9World Gold Council, Gold Demand Trends, full year and Q4 2018, January 31, 2019.
10World Gold Council, Gold Demand Trends, full year and Q4 2018, January 31, 2019.
11World Gold Council, Gold Demand Trends, full year and Q4 2018, January 31, 2019.
12World Gold Council, “Investment Update: Cryptocurrencies are no substitute for gold,” as of 01/25/2018.
13Bloomberg Financial L.P., State Street Global Advisors, 12/31/2017-12/31/2018.
14Bloomberg Financial L.P., State Street Global Advisors, 10/03/2018-12/24/2018.
15Bloomberg Financial L.P., State Street Global Advisors, 12/31/2017-12/31/2018.
A type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
A digitized, decentralized, public ledger of all cryptocurrency transactions.
A digital or virtual currency that uses cryptography for security. A defining feature of a cryptocurrency, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.