There’s gold in them thar hills, or so Yosemite Sam might say these days. The price of gold is up 11.1 per cent this year, approaching its all-time high of US$2,074.88, while miners are enjoying a bounce as well. Kinross Gold Corp. is up 30.4 per cent this year, Agnico Eagle Mines Ltd. is up 8.9 per cent and Canada’s largest gold miner, Barrick Gold Corp., is up 10.6 per cent. And streamers Wheaton Precious Metals Corp. and Franco-Nevada Corp. are up 28.1 and 13.1 per cent, respectively.
At least part of the metal’s golden times can be attributed to a flight to safety. Gold typically does well in uncertain times, and many, including Stan Druckenmiller, the billionaire founder of Duquesne Family Office and one-time money manager for billionaire George Soros, think the United States economy is teetering on the edge of a recession and predict a hard landing. Druckenmiller defines a hard landing as unemployment topping five per cent, corporate profits slumping at least 20 per cent and rising bankruptcies. Fear can be contagious, as Warren Buffett pointed out at Berkshire Hathaway Inc.’s annual general meeting last weekend, especially if people are afraid their banking deposits aren’t safe.
There’s so much interest in bullion that economist David Rosenberg introduced a gold model to his Strategizer investing report on Monday even though he thinks a pullback is in order. “Thanks to a 21 per cent surge from the nearby lows, nearly breaking to a new record high in the process, gold is now very overbought, and sentiment has become exceedingly bullish,” he says. He’s still bullish in the long term, but says a period of consolidation is needed.
But it’s not just investors piling in. Central banks are big buyers — some swapping out their U.S. dollar and Treasury holdings — and their appetite for gold in 2022 rose 150 per cent to reach a 55-year high. “If central banks keep buying and flows increase into gold ETFs, gold’s rally should extend,” say BofA Global Research strategists, who recommend investors sell some stock and bond holdings and make gold 25 per cent of their portfolio.
How about bitcoin, which was supposed to replace gold as a store of value? It’s sitting around US$26,000, less than half what it was trading for in November 2021 at the height of cryptomania. That’s US$10,000 more than it was trading for at the start of the year, but its volatility hardly makes it a store of value. Day-trading scheme? Sure.
If you got into cryptocurrencies early, you made out like a bandit, which is exactly who you’re supporting by buying tokens that are backed up by, well, nothing. Proponents will say cryptocurrencies are technically neutral, but they were designed to circumvent existing financial system rules, so we all know who is using them: organized crime, terrorists, Russia, to name a few. It is rather funny that some ESG-focused investors won’t buy oil stocks, but have no shame funding war crimes. To each their own when it comes to ethics.
Ethics aside, you can’t do much with bitcoin except hope someone dumber than you will pay more than you did. Of course, you can’t do a whole lot with gold, either. The gold standard was effectively killed in 1971 when the United States untethered its dollar. But gold does have some industrial uses, plenty of jewelry buyers and, when compared to cryptocurrencies, retains its value, more or less.
Cryptocurrencies have their fans, too, though securities regulators certainly are not among them as they continue to try to crack down on the lawless nature of the industry, something that is apparently succeeding judging by both the lack of auditors willing to risk their reputations on crypto concerns and pricing. “We are currently in a really low liquidity environment,” says Henry Elder, head of decentralized finance at Wave Digital Assets LLC. “And in large part it’s been caused by the withdrawals of market makers from the market, because the regulatory picture in the U.S. has gotten so hazy.”
On the right side of regulation, some central banks seem to be interested in offering fiat cryptocurrencies, which they prefer to call digital currencies. The Bank of Canada has been investigating one since 2013 — bitcoin was launched in 2009 — and while it still doesn’t think it’s necessary, it wants to know what we think.
Could central bank digital currencies (CBDCs) put a damper on existing cryptocurrencies? It likely depends on the features, says Katrin Tinn, an assistant professor in finance at McGill University’s Desautels Faculty of Management, who co-wrote a paper last fall called Why Digital Currencies Could Change the Future of Central Banking.
“Based on my own research, I would argue that a CBDC that offers maximal privacy of individuals’ spending and is a legal tender would be a more compelling alternative to cryptocurrencies as a pure digital means of payments and money,” she says. “Furthermore, if such CBDCs enable built-in smart contract functionalities and/or ways to interact with major crypto-asset platforms, there are many possible positive synergies, and the most interesting innovations from the crypto-space might even benefit from these CBDCs. This would be an exciting prospect.”
If the features of a CBDC are limited, however, its impact on bitcoin and the like would also be limited. Either way, cryptocurrencies are here to stay no matter how hard regulators push to regulate the industry. A modern-day Yosemite Sam might even do some digital mining to help heat his home, though that doesn’t sound so appealing in the summer.
