Bitcoin no substitute for gold, says World Gold Council

Jan 25th, 2018 | By | Category: Commodities

“Bitcoin, and cryptocurrencies more generally, are not a substitute for gold”, concludes the World Gold Council in its latest investment update. While the assertion might not come as a huge surprise, the organisation makes some valid points.

Joe Foster, Portfolio Manager and Strategist for the Gold and Precious Metals strategy, Van Eck

Is cryptocurrency a threat to gold?

The price of Bitcoin may have risen 13-fold last year, but this rise has been accompanied by extreme volatility – as illustrated by the sharp 40% price drop in December 2017.

Bitcoin moves, on average, 5% a day. This is almost as high as the realised volatility of the VIX itself. While this may appeal to investors looking for extremely high returns, it doesn’t make it an ideal store of value and is hardly a characteristic of currency.

Trading in gold also benefits from authorisation and regulation in many markets. Cryptocurrencies are broadly permitted, but concern about capital flight and investor protection may lead to heavier restrictions. China, for example, has greatly limited their use.

Size and liquidity play important roles too, as gold benefits from a large, global market. The World Gold Council estimates that physical gold holdings are worth approximately $2.9tn and it can trade $220bn per day through spot and derivatives contracts over-the-counter.

Gold-backed ETFs offer an additional source of liquidity, with the largest US-listed gold ETF, the NYSE Arca-listed SPDR Gold Shares (GLD US) from State Street Global Advisors, regularly trading around $1bn per day.

The same cannot be said for cryptocurrencies. Although the market is estimated to be valued at over $800bn, volumes are low compared with gold and other currencies. Bitcoin trades $2bn, on average, per day, which is less than 1% of the total gold market.

Gold continues to perform an important role

The crypto-market is young, and liquidity is scarce. Its price behaviour is still attractive to many investors, but that is driven by high return expectations.

Gold has played a key role in diversified portfolios for years, performing well in periods of inflation and moving with negative correlation to other assets during downturns. Their purposes as investments are very different.

The future of gold looks bright

The price of gold has risen over the past few months, as Joe Foster, Portfolio Manager and Gold & Precious Metals Strategist at asset manager and ETF issuer VanEck, recently commented, “As gold hits its highest level for four months, we think its valuation is supported by the markets not pricing in the longer-term impact which further monetary tightening from the Fed could have on a late-cycle economy.”

He added, “We expect gold to continue to form a base, trading in the $1,200 to $1,350 per ounce range in the near term, with a longer-term view that increased financial risk deriving from a potentially weaker or slowing US economy, as well as heightened global geopolitical risk and political struggles in Washington DC, could drive gold much higher.”

How to gain exposure?

There are various gold ETFs, including funds tracking the performance of gold miners, such as the VanEck Vectors Gold Miners UCITS ETF (GDX LN). Among the most popular options, however, are physically backed vehicles offering direct exposure to gold bullion. In Europe, these include products from ETF Securities, iShares and Source.

ETF Securities was the first to market in 2004 with its Gold Bullion Securities (GBS LN), in partnership with the World Gold Council. This was followed by the ETFS Physical Gold (PHAU LN) in 2007, priced at 0.39%, which is now larger, with assets of $6.5bn. Source launched its main gold product, the Source Physical Gold ETC (SGLD LN), in 2009 and has around $4.8bn in AUM. It is slightly cheaper than PHAU, coming in at 0.29%. The iShares Physical Gold ETC (SGLN LN), meanwhile, is the youngest and smallest of the three, debuting in April 2011 and with $3.3bn in assets. However, it has the least expensive headline fee, coming in at 0.25%.

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