Authored by John Ciampaglia, CFA, CEO Sprott Asset Management
One prominent 2017 storyline was, "Gold is dead — long live cryptocurrencies!" Gold and cryptocurrencies were cast as opponents in a "monetary" boxing ring featuring the two best alternatives to fiat currencies that are decentralized and function outside traditional government-controlled financial systems.
To anyone unaware of gold’s role as a medium of exchange and a store of value over the past 5,000 years, it seems obvious that cryptos appear to offer the best of gold’s benefits without the old-school boredom. Last year, digital currencies looked like the natural evolution for monetary skeptics — a new alternative all wrapped up in a leading-edge cryptographic algorithm you could store in your digital wallet. Who buys gold coins anymore? Hold on a minute. Scanning the headlines today and listening to the talking heads, there is certainly far less euphoric crypto chatter. The nearly 70%, four-month collapse in crypto-king Bitcoin seems to have stunned its army of advocates.
Bitcoin is part of a powerful new technology making it a lot more exciting than gold, but does anyone still think Bitcoin is a proven "store of value?"
It is ironic that gold has become the go-to analogy for what Bitcoin supersedes. Yet in countless media reports on digital currencies, what physical, tangible object is usually pictured to represent a Bitcoin? Looks a lot like a shiny gold coin with a $-sign stamped on it.
Which leads to the related observation that gold has been the same tangible, physical thing for thousands of years. An ounce of gold is an ounce of gold. Always has been and always will be. The only Bitcoin attribute similarly beyond debate is that almost everyone has no clue what a Bitcoin represents or how it should be valued. Gold has a near infinite track record of performance and function. Cryptos, by contrast, are in the first inning of a game with amorphous rules, making it hard to score and ultimately know who will win. Essentially, crypto investors are buying into the early stages of a startup. And with most startups, comes uncertainty, risk and volatility — not safety.
A primary reason why investors have always looked to gold is for protection against central banks’ monetary policy decisions. It’s a diversification and safety tactic, not one for speculation. You see this difference in how the two assets — gold and Bitcoin — move. My colleague, Sprott Asset Management Senior Portfolio Manager Trey Reik, showcased this difference in volatility in his 2017 report, Why Cryptocurrencies (Bitcoin) are Unlikely to Usurp the Role of Gold.
From a February 2001 low of $253.85, spot gold climbed 657% to a September 2011 high of $1,921.15, before falling 46% to an intra-day low of $1,046.43 in December 2015. Describing these bull and bear runs, Reik wrote, “Of course, these moves took ten-and-a-half years and four-and-a-quarter years … to unfold.”
Meanwhile, Bitcoin rose an astounding 1,270.5% in 2017. Thus far in 2018, it has fallen 45% and sits 62% from its all-time highs, which it hit in December 2017. It took cryptocurrencies just three months to fall 46% — a decline that took gold four years to cover (2011 to 2015).
As shown in the charts below, for the trailing 12-months, Bitcoin’s price range has spanned an astounding 1,647% compared to sober gold’s 13% span.
Price Ranges of Bitcoin and Gold: Trailing 12 Months (April 6, 2017, to April 6, 2018)
When investing in gold, extreme volatility has not been the historical norm. Even at a time when market sentiment has been mostly ebullient, a historically less active period for investing in the metal, gold has still risen 6% over the past year (for the 12 months ending April 6, 2018).
Gold investors also know that there is a baseline to their investment since no matter what goes wrong in the financial markets, gold still has inherent value. That’s certainly not the case for cryptocurrencies. Gold investors can also take comfort in the fact that many societies and central banks continue to hold gold as a store of value.
The backbone of cryptocurrencies is blockchain technology – a distributed, immutable ledger. At Sprott, we believe this revolutionary innovation will change banking, payment systems, contracts and trading. We also believe it will change precious metals investing and have invested in TradeWind, a technology startup that uses the blockchain to speed up and streamline digital gold trading (Read Sprott-Backed Blockchain Platform to Give Gold Digital Edge). Gold will likely become a form of digital money one day, due to the blockchain’s capabilities. It’s technology we want to support.
Cryptocurrencies, as opposed to the blockchain, refer to the intangible digital “coins” encoded on various public blockchains. That means the fluctuations of the cryptocurrency provides a constant read on the market’s opinion of the particular blockchain. It’s as if you’re viewing the real-time market analysis of a startup within an incubator. When commentators compare the performance of cryptocurrencies to gold prices, it’s like benchmarking a Kickstarter project against Apple Inc. (AAPL). The two aren’t meaningfully comparable, and neither are gold and cryptocurrencies.
You can find an illustration of these startup dynamics in the rise and fall of Lumens, the cryptocurrency developed by Stellar, a blockchain-based financial payment platform. Lumens’ market capitalization jumped from $313 million in October 2017 to $16.4 billion in December 2017, due in part to a deal with IBM.1 The deal came at the height of the general hysteria surrounding cryptocurrencies, which aided in Lumens’ rise. After the fervor over IBM’s participation passed, the market revised its expectations, leading Lumens’ market cap to shed more than $12 billion.2
What happened with Lumens should be expected. When placing wagers on cryptocurrencies, it’s not a safety or diversification play, but speculation. You’re betting on startups, whether there’s a company behind it or, like Bitcoin, a decentralized blockchain that you believe will become more mainstream. Tomorrow, any public blockchain could crumble due to lack of funds, lack of users, weak governance, a security breach, or multiple other common risks that face new businesses. Any of these could send the price of the crypto down to $0, leaving investors with nothing.
Gold isn’t a startup, and it is certainly no "flash in the pan." Gold investors do not have to worry about a "company" dissolving, and no matter what happens there is always value in gold bullion — hence its deserved immutability. And that’s been proven over millennia.
|1||“IBM And Stellar Are Launching Blockchain Banking Across Multiple Countries,” Fortune.com, http://fortune.com/2017/10/16/ibm-blockchain-stellar/|
|2||Price changes and market capitalizations were based on April 4, 2018 levels.|
This content is intended solely for the use of Sprott Asset Management USA Inc. for use with investors and interested parties. Investments, commentary and statements are unique and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this presentation are those of the presenter and may vary widely from opinions of other Sprott affiliated Portfolio Managers or investment professionals.
This content may not be reproduced in any form, or referred to in any other publication, without acknowledgment that it was produced by Sprott Asset Management LP and a reference to www.sprott.com. The opinions, estimates and projections (“information”) contained within this content are solely those of Sprott Asset Management LP (“SAM LP”) and are subject to change without notice. SAM LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. SAM LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. SAM LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, SAM LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.
SAM LP is the investment manager to the Sprott Physical Bullion Trusts (the “Trusts”). Important information about the Trusts, including the investment objectives and strategies, purchase options, applicable management fees, and expenses, is contained in the prospectus. Please read the document carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Trusts.
The risks associated with investing in a Trust depend on the securities and assets in which the Trust invests, based upon the Trust’s particular objectives. There is no assurance that any Trust will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Trust will be returned to you. The Trusts are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Trust’s prospectus before investing.
The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada or the United States should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action.
You are now leaving sprottus.com and entering a linked website.Continue
You are now leaving Sprott.com and entering a linked website. Sprott has partnered with ALPS in offering Sprott ETFs. For fact sheets, marketing materials, prospectuses, performance, expense information and other details about the ETFs, you will be directed to the ALPS/Sprott website at SprottETFs.com.Continue to Sprott Exchange Traded Funds
You are now leaving Sprott.com and entering a linked website. Sprott Asset Management is a sub-advisor for several mutual funds on behalf of Ninepoint Partners. For details on these funds, you will be directed to the Ninepoint Partners website at ninepoint.com.Continue to Ninepoint Partners