Are Gold and Bitcoin Buyers on to Something?

Are Gold and Bitcoin Buyers on to Something?

We are in very unique times. In 1963, the late Sydney Homer published the first edition of his book A History of Interest Rates. The book covers 4,000 years of interest rate history and is now in its fourth edition. It has become a classic in the field of finance and economics.

However, nowhere in the pages of Homer will you ever read zero interest rates.

So that’s how extraordinary and abnormal the last ten years have been. Human history has not yet experienced the zero interest rates that we have all experienced over the past decade.

Today, a government’s response to any crisis is to throw money at it and cut interest rates as quickly as possible. One consequence of this liquidity-driven stimulus is that house prices (real assets) are rising much faster than wages, leading to affordability crises.

The population is therefore being squeezed by inequality, with house prices in many cities generally rising by 50 to 100 percent after 2010, while wage growth is only 20 to 30 percent.

The second-order effect is that governments are unable to raise taxes because the population cannot pay them. And because the population is aging, government deficits are increasing.

Spurred on by Modern Monetary Theory (MMT), which posits that currency-issuing governments can always make money without default, using inflation as a “relief valve,” the only tools governments and central banks have now are indeed making money.

By that I mean ‘debt monetization’ – when a central bank directly or indirectly finances government spending/deficits by purchasing government bonds with newly created money (essentially ‘printing’ currency). They do not increase revenues through taxes, productive growth, or real market borrowing; they expand the money supply to cover shortages and avoid bankruptcies or budget cuts.

The downside, of course, is that it erodes savings, punishes savers, drives inequality (asset owners gain) and leads to ‘fiscal dominance’ where central banks lose their independence.

And while alternatives include immigration to tackle an aging population and boost productivity through technology, the result is suppressed returns that keep borrowing cheap, distorting stock and housing markets.

A more important consequence, however, is monetary devaluation.

During such times, investors need monetary inflation hedges such as gold and cryptocurrencies, which explains their recent record high prices.

The question is of course: where to go next?

What is the future for gold and crypto?

Despite the retail rush into gold in recent days, which suggests a short-term spike is developing, and ignores particularly irrational retail purchases of physical bullion in lieu of exchange-traded funds (ETFs), several experts say the long-term outlook for both gold and Bitcoin is bullish.

In his book Capital Wars, Michael Howell notes that the real battleground between America and China is control of capital and the world’s capital flows. More recently, and more specifically, Howell notes that there is a struggle to develop a dominant financial system to provide money as collateral.

While the US seems to be moving towards digital collateral one way or another, whether that’s a stablecoin or repackaging treasure via a stablecoin, China is collateralizing its system through gold.

However, the US strategy allows the world’s citizens to abandon their domestic currencies and switch to the US dollar system, which is of course Trump’s plan. This might make the Chinese very nervous.

Take, for example, a Chinese exporter currently hoarding cash. Currently, their choice is between depositing money in Western banks and risking it being seized, just as the Russian oligarchs’ funds were seized by Western authorities outside the war in Ukraine, or depositing it in domestic Chinese banks, which could also seize it on a whim.

It immediately becomes clear that it becomes attractive to deposit the money in the dominant stable coin, which offers some anonymity and protection. The resulting capital flight could pose a huge threat to the Chinese and to the integrity of the Chinese financial system. According to Coinspot, the combined market cap of all stablecoins has already surpassed $460 billion, indicating that more capital is coming “on-chain” and being used across the crypto ecosystem.

The Chinese are understandably afraid of capital flight and losing control. That is why strict restrictions have been imposed and have been in place for years.

Perhaps in response to this, the Chinese are gilding their financial system (pun intended) and this is reflected in the wave of liquidity being injected into the markets (a trillion dollar equivalent in their monetary system) – they clearly want to ease their debt problem.

As a side note, the only way a country can extricate itself from a debt mountain without defaulting (which of course is not possible if the debt securities are the collateral of the financial system) is to devalue its paper money, and that is what China is trying to do: devalue the Chinese yuan against real assets, devalue it against gold.

Two material and persistent forces are devaluing paper money and boosting gold and crypto. One is China and the other is the US. According to Howell, assuming the real gold value of US debt remains constant from here, the skyrocketing debt amount says gold will test above $10,000 per ounce sometime in the mid-2030s. And by 2050, this could be $25,000 per ounce. Then consider what Bitcoin could do in that time frame, given its tendency to lag gold. Unique times indeed.

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Roger Montgomery is the founder and chairman of Montgomery Investment Management. Roger has more than three decades of experience in fund management and related activities, including equity analysis, equity and derivatives strategy, trading and securities brokerage. Before founding Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

He is also the author of the best-selling investing guide to the stock market, Value.able – how to value and buy the best stocks for less than they are worth.

Roger regularly appears on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The main purpose of this message is to provide factual information and not advice about financial products. Furthermore, the information provided is not intended as a recommendation or opinion about any financial product. However, any comments and statements of opinion should contain general advice only, prepared without taking into account your personal objectives, financial circumstances or needs. Therefore, before acting on any information provided, you should always consider its suitability in the light of your personal objectives, financial circumstances and needs and, if necessary, seek independent advice from a financial advisor before making any decision. Personal advice is expressly excluded in this message.