Is bitcoin displacing gold as an inflation hedge?

According to JP Morgan, bitcoin has made the institutional investing community reassess the usefulness of gold, with rising concerns of inflation this year. Going by the frenetic interest in bitcoin from institutional investors, it does look as though gold has been left behind.

Throughout the last five years, gold has meandered upwards from $1250 to its current $1830. Under ordinary circumstances, this would be seen as a respectable return. But compare that with bitcoin’s growth during that same time period: $615 to $67,000. The spectacular rise of bitcoin has dethroned gold from its time-honoured position as the ultimate store of value and safe-haven asset. Much of the thanks for bitcoin’s stellar performance go to adoption of the Lightning Network. Lightning is a second layer technology that resolves the bitcoin first layer’s reputation for slow transaction resolution without compromising the integrity of the bitcoin network as a whole.

In the past, holders of gold were prepared to overlook several issues about their asset, including its reputation for poor transparency. Such a reputation would have been remedied by auditing. The purpose of a gold audit is to give the public a full reckoning of the gold inventory in the vaults that are under the control of the US Treasury. The public has the following expectations from a gold audit:

• The audit is a full record of the gold inventory inside each vault,
• The inspectors implement auditing policies and procedures which includes assaying the metals i.e. a forensic check as to the purity of all bars and coins, and documenting the entire inventory of the vault so that all the contents are fully accounted for,
• The vaults should be physically verified and sealed after the audit and should remain so until the next audit (a “next audit” should not be necessary),
• The Treasury should keep records of all audits including the assaying documentation,
• The full audit records should be available to the American public,
• The US government speaks the whole truth about its audits to the public.

However, attempts to establish a clear record that the US government has ever completed an audit have been met with many problems:

• The 1953 audit has missing audit and assay documents with only 1/10th of the Fort Knox vault accounted for,
• The Treasury’s Office of the Inspector General (OIG) had lost 10 audit reports between 1974 and 1986,
• The Federal Reserve of New York’s (FRNY) Continuing Audits program that ran from 1975 to 1985 was deemed “unaudited” by a new 1986 audit because the assaying of samples of some foreign gold coins (30 US tons’ worth) had not been finalized. As a postscript, the FRNY Continuing Audits program was terminated with this glib statement: “...virtually all of the gold in custody of the Mint had been audited and essentially no discrepancies were found”,
• The OIG’s general conduct over the 1993-2008 audits was put into question with accusations of corruption, tampering with previous audits where a vault containing 2500 US tons was reopened and, then, re-audited with no explanation. Meanwhile, the OIG’s senior staff exhibit ignorance of established policies and procedures,
• The Director of the US Mint who, in 2015, on being asked about the true composition of gold bars at Fort Knox referred to what “he was told by the Fort Knox protection staff”. In other words, he seemingly lacked key knowledge about the largest vault in the USA,
• The US Treasury, OIG and US Mint have each dragged their heels when dealing with Freedom of Information Act requests. The latter, on one occasion, charged a precious metals researcher over $3000, in 2016, for the production of papers concerning the 1993-2008 gold audits. And even then, they were produced in a heavily redacted state.

This is just a snapshot of problems related to the U.S.'s gold audits, as outlined in a 2018 report published by Bullion Star. It has been estimated that these problems put the security of up to 6000 US tons of gold at risk.

Investors in gold have also had to navigate the unclear rules of ownership of gold in an unsegregated account with a broker; the tightly centralized control over how gold is priced; the difficulty in storing gold bullion privately (many stories abound of holders burying them “under the fuchsias”); and, ultimately, the ease with which governments can declare possession illegal. In fact, in the US, possession of gold was forbidden between 1933 and 1975.

Holding and moving gold successfully requires epic levels of trust in both the counterparty and the government. In this age of the internet along with the rise of a highly mobile and skeptical type of investor, the issues with owning gold are now so apparent that it is no longer an attractive inflation hedge.

It is in this context that, a few weeks ago, JP Morgan cited three factors in explaining the surging interest in bitcoin:

1. The US government having stated it has no plans to ban bitcoin;
2. El Salvador’s recent elevation of bitcoin as legal tender with the Lightning payment rail;
3. Real inflation, which is now becoming visible on Main Street

I would go on to add that bitcoin beats gold because it’s open for anyone to audit, there is no centralized authority that can shut the network down and anyone can hold their bitcoin directly with no ownership ambiguities. Anyone can audit the blockchain in real time and have confidence that the record is complete. There is no-one who can conceal part of the record or “lose” parts of the blockchain and, as bitcoin was born purely digital, assaying is irrelevant. An audit of the bitcoin blockchain will give a provable figure of the exact number of coins in circulation. Blockchain analytics can also give the statistics of each address including how long it has existed, days since it was last active and many other facets that an auditor will want to see.

JP Morgan has also explained to Market Insider that ETF activity had been reflecting the huge enthusiasm for bitcoin at the expense of that for gold. The bank said that, in 2021 (as far as October), over $10 billion had been withdrawn from gold ETFs, while more than $20 billion had been deposited into bitcoin funds.

They used to say that a 1-oz gold coin, in imperial Rome, would buy you a good toga, and that same coin would now buy you a good suit. But this illustration of gold’s value retention through the centuries loses its impact when compared to the surge of bitcoin: From buying you next to nothing in 2009, 1 BTC will now buy you a Mercedes-Benz SUV, among other things.

So I would ask anyone who hasn’t already invested in bitcoin: what more would it take for you to consider it?

Stephen Thompson is a Bitcoin Researcher at LQwD Fintech Corp., the first publicly traded, pure-play, purpose-built bitcoin Canadian company that’s focused on solutions that power the growth of the Bitcoin Lightning Network based in Vancouver.