"Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants, and debt is the money of slaves."
Ralph Waldo Emerson

Gold essentially has two modern “money rivals”- fiat currency and cryptocurrency. This essay explains why the rivals fall short.

HISTORY

The rise and fall of civilizations has been tied to gold for over 5,000 years. The Egyptians, the Greeks, the Romans, the Aztecs, the Spaniards, the list goes on and on… and with central banks in the USA, China, and Russia hording it there is no reason to think the 21st century will be any different.

Yet, there is one important difference between our ancestors and today. That difference is technology – specifically mobile computing and cryptocurrency. Before I explain this story we need to look at some terms from the Oxford dictionary that lay the foundations:

    • Utility: the quality of being useful (R1)
    • Value: how much something is worth in money or other goods for which it can be exchanged. (R2)
    • Trust: the belief that someone or something is good, sincere, honest, etc. and will not try to harm or trick you. (R3)

Utility

TRANSPORT

Modern anti-gold advocates in both camps point out how difficult gold is to transport, thus (they claim) portability limits golds usefulness as money. True, but they forget this is one reason why gold backed paper bank notes were created over 500 years ago in the first place. So the physical transport issue was solved long before the Internet. Today, mobile computing allows any user with a cell phone to buy, store, and sell physical gold virtually – just like you would with a crypto wallet or a fiat bank app. Here are some examples: gold sites compared and 101 starter tips.

UTILITY

The flip side of the “gold is a barbarous relic” argument is that aside from coins, dentistry, and jewelry, what is it really good for? The short answer is electronics – including the mobile device you might be reading this article on right now.

Gold is a highly efficient conductor and anti-corrosive agent used widely in electronic devices: “A small amount of gold is used in almost every sophisticated electronic device. This includes cell phones, calculators, global positioning system (GPS) units, and other small electronic devices. Most large electronic appliances such as television sets also contain gold.” (R4)

So in terms of utility, what more does anyone want? 1/3 of all gold used in the USA in 2017 was for TV’s, computers, and mobile phones. Neither fiat nor crypto have any physical utility at all. It’s true that neither was created with raw physical utility in mind anyway, but it is important to note when we speak of value beyond speculation, medium of exchange, unit of account and all the other things we tie to the definition of money. Raw utility is meaningful. Gold has both a very long history as money and real world utility behind it,… neither fiat or virtual currency can claim that, but there’s more.

Fiat's Value

VALUE

For decades policy makers have lauded British economist John Maynard Keynes often forgetting his views were forged in the fires of major extremes – two world wars and the Great Depression. Keynesian economists claim there is such a thing as “good government debt” fueling “efficient markets” forgetting their scenario is forever underwritten by tax payers. A century of money printing has given us a command economy macroeconomic money printing machine that would make Lenin blush. Central banks around the world are creating artificially low interest rates that under-pin anti-free market QE policies… and an ever growing sovereign debt bubble.

They seem to not understand that debased currencies pave the road to poverty.., or do they? Despite it all, the same irresponsible central banks responsible in large part for the existing debt bubble are hording gold at record levels.

Why? The short answer is the simplest— they know JP Morgan was right “money is gold and nothing else”. Gold’s scarcity has been a natural inflation hedge for centuries, and I believe that is why Satoshi limited Bitcoin’s supply to 21 million. Scarcity = Value.

“The top 1/10th of 1% net worth is equal to the bottom 90% combined” Ray Dalio (CNBC 4:30). 

Today we are living in the longest bull run in history (2009-2020)- but what financed it and who really benefited? Ray Dalio (who sits in the 1/10th category) answered that question. It was financed by enormous debt backed by the bottom 90% (2008 being the epic example). The only value fiat currency has is the accumulation of debt – that is why all fiats eventually fail. 

Debt is the facade of value. It is the money of slaves. As Benjamin Franklin wisely put it “Think what you do when you run in debt, you give to another power over your liberty”. No nation can ever debt its’ way to prosperity. Unfortunately, the “spend money we don’t have” mentality that fuels government programs, bailouts, and canned debt that we accumulated in the last half century will kick back in your life time. This is an obvious truth, but don’t take my word for it, please do your own research. 

In the end, facts do not lie. What we’ve had for the last 50 years is a kick the can down the road economy,… that continues to dilute the purchasing power of the USD, which very overtly hurts all fiat savers and future generations that have to pay these debts.

PLAN B's VALUE

Bitcoin backers (particularly those with Austrian leanings) say value is in the eye of the beholder thus the skyrocket rise of Bitcoin over the last decade is pure validation by open market forces. Many in the Bitcoin camp believe its’ value is as infinite as the dollars the Federal Reserve prints. As if its’ mere existence is enough.

True, no asset (in modern times anyway) has accelerated as fast as Bitcoin, and there is good reasons for that. The core idea and the networks that have grown around it are incredible.  Since its’ inception a decade ago Bitcoin (and many of its’ altcoin clones) have sprung positive innovations that have revolutionized digital commerce, and we are just scratching the surface. IMHO, Satoshi Nakamoto is Tesla 2.0.

However, as a child of the Internet, its real value will come from real world utilization which over the last decade it has completely failed to do. Even the most ardent crypto supporter (such as myself) has to admit that. 

Will that situation change? – yes probably; but as of this writing it has not. Like all technologies that came before it, utilization will rest on scale.  

TRUST

The onus here is definitely on fiat and Bitcoin. Despite all the crypto engineering gains, scams are rampant and there is community fragmentation everywhere. The promise of an “Internet of Money” has given way to “store of value”, speculation, yield, HODL, FOMO, pump and dump, pump and stake, pump and pray, etc, etc.

A century of command economy central banking has dwindled the USD’s original purchasing power to under .03 cents. Historically, all fiats fail. Assets with real utility have lasting buying power and offer a real defense vs. the economic chaos we have today. Fiat is not that, and crypto has a long way to go.

Yes, I admit gold is not perfect. The price (like silver) is being manipulated. Artificially low prices are giving central banks more hording  opportunities; and to think that past barriers to keeping gold won’t return is not a view informed by history.

If you believe Utility + Value = Trust over time the vast majority of crypto projects will fail – it’s only a matter of time; but to throw the baby out with the bath water would be a giant mistake. 

The crypto market will thin itself out as capital and patience wares out. Utility will find a home and when it does the projects left standing will change the world, just not today. Today gold wins the overall debate not just because it has more utility, value, and has earned trust over centuries,… no the most important difference is a lot more fundamental (and simple) than that.

ALCHEMY

The main difference between gold and its money rivals is so easy to understand and so hard to argue with that even my 7 year old understood it right away. 

For centuries scientist (commonly known as alchemists) have tried to create gold and they have failed. Fiat and Bitcoin on the other hand can be cloned to the tune of thousands of different fiat currencies and thousands of altcoins. The Bitcoin protocol itself can set limits that create virtual scarcity in code- thus long-term value (as long as strong governance keeps it from changing); but the core code is open source. That cuts the scarcity argument at the knees because it can and has been changed in many altcoins already, including the ones that claim dominion over decentralized finance.  Intellectual property (IP) protection is a value hedge that many projects have pursued in the past and are aggressively pursuing today. 

Is IP enough? Look no further than IBM – their IP portfolio is massive yet its’ licensing value from 2005-2015 declined vs. its’ for sale sign value. IPs real hedge is feature set in software architecture, but even that has its’ limits. In the end IP is a castle moat, not an ocean.  

Cryptocurrencies and fiat are not anywhere near as valuable as gold simply because they can be cloned; they are at the whim of alchemy. The US dollar has unearned trust because the more the Federal Reserve prints the worse the global debt crises gets. Crypto IP is a defense with value potential, but without great business leadership and for-profit projects with meaningful utility even that will not be enough. There simply cannot be any mass adoption or real trust without value driven by utility… and a real peg (like gold or some other commodity) wouldn’t hurt.

Until that scenario changes, any current value Bitcoin or any altcoin represents is just speculation; but I believe this situation will change, eventually.

R1/R2/R3: https://www.oxfordlearnersdictionaries.com/ |
AU Picture: Photo by Aaron Munoz on Unsplash |
Uses of Gold in the US: linked above from Geology.com |
Gold Chart: linked above from Sdbullion.com |
Purchasing Power: linked above from Shotguneconomics.com |
Stormtroopers: Photo by Phil Shaw on Unsplash