Goldman Sachs Shades Gold For Bitcoin As Store Of Value
A Goldman Sachs (GS) research note published on January 5, 2022, has captured headlines on the major news websites along with Twitter.
The note suggests that gold currently holds 80% of the market for money-seeking exposure to “store of value” markets whilst Bitcoin now holds 20%.
And a Bloomberg article captures the Bitcoin price direction of the GS research note with the headline: “Goldman says Bitcoin $100,000 a Possibility by Taking on Gold”.
To start, the mere simplification that only two choices exist for investors as a ‘store of value’ is laughable!
Silver provides a ‘store of value’ and so do homes, and so do certain stocks and so does art, just to name a few. Also, volatility is a key determinant.
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Per the Economist, over the past 5 years, the gold price has changed (either up or down) by an average of 0.6% per day. By comparison, the daily move for Bitcoin has been closer to 3.5%.
Is Bitcoin the New Gold?
The GS January 5 note went on to suggest that bitcoin could hypothetically grow to 50% of the market for ‘store of value’ markets as the price of Bitcoin rises to US$100,000.
Furthermore, this growth is presumably at the expense of gold.
Even excluding the oversimplification of the ‘store of value’ market limitation implied by the research note to only gold and Bitcoin – does the data hold up?
Below is the chart from the GS research note, pulled from a Bloomberg article, which shows the ‘Store of Value’ Market Capitalization of Gold (dark blue) and Bitcoin (light blue).
The chart shows the current value of this investment in gold of around US$2.6 trillion and this investment in bitcoin of around US$700 billion. Hence the assertion that Bitcoin is 20% of the ‘store of value’ market.
The next question is – where did these figures come from?
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Starting with Bitcoin, according to coinmarketcap.com there are 18,926,275 Bitcoins currently in circulation at a price of US$42,757 per coin which equates to a total market cap of approximately US$809 billion.
Taking out lost account passwords, and other unknowns a float-adjusted market cap of around US$700 billion makes sense.
However, using these figures suggests that all Bitcoin is considered as part of the ‘store of value’ market. Also does not leave any for speculation, corporate accounts, hedge funds, etc.
Now compare this to the privately held for investment purposes ‘store of value’ market number of US$2.6 trillion for gold.
Above ground stocks data from the World Gold Council’s (WGC) website estimates that all gold that has ever been mined (through 2020) which is now available for use (jewelry, bars and coins, official reserves, and unaccounted) totals approximately 201,296 tonnes.
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Also, assuming a gold price of US$1800 per ounce, this equates to an approximate value of US$11.6 trillion.
To get this estimated value down to the US$2.6 trillion used in the GS research note. The authors dropped all the following sectors of the gold market: the ‘unaccounted for and other fabrication use’ which is estimated at 29,448 tonnes (value of US$1.7 trillion), official holdings by global central banks at 34,210 tonnes (value of US$2.0 trillion), and gold held in the form of jewellery 93,253 tonnes (value of US$5.4 trillion).
In other words, to make the GS headline grabbing research note very dramatic the GS note implies that no ounce of gold used for jewellery or held by governments is considered a ‘store of value’.
The only gold holdings the GS note has considered to be a ‘store of value’ is gold held in bars & coins at 40,621 tonnes. Also, gold held in ETFs at 3,764 tonnes which gives a combined value of approximately US$2.6 trillion.
The US$2.6 trillion value only accounts for 22% of the total value of the gold market vs the bitcoin number which, in turn, accounts for 90% of the total bitcoin market capitalization.
However, the countries with the largest consumer demand for jewelry are India and China, which arguably meet the criteria for ‘store of value by a private investor’ as jewelry is bought as a ‘store of value’ for weddings and such.
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Furthermore, what about central bank holdings, although not private investors the reason central banks buy gold is a ‘store of value’ and currency diversification. The same reason that private investors hold gold.
The point is that the headlines and media hype about the research note regarding the market share of bitcoin vs gold as a ‘store of value’ not only excludes many other forms of investments but that it is not an apples-to-apples comparison of ‘store of value’ market capitalization of the two markets, as the GS note implies.
But we suppose Goldman gotta be Goldman sometimes and we can’t help but wonder if the re-opening of its crypto trading desk had an influence on this research note.
From The Trading Desk
Market Update
Gold has moved back above $1800 and is back again at its recent highs at $1820 this morning, this came on the back of the more upbeat market sentiment, weaker US dollar, and declining treasury yields.
Later today, we will get more data on the US economy with the release of the core CPI index (which strips out food and energy costs) forecasted to go from 4.9% in November to 5.4% in December.
Moreover, the CPI index which contains energy and food costs is forecast the current level of inflation in December will reach 7% year over year.
Also, the only thing the Fed can do now to fight rising inflation is to raise interest rates.
Goldman Sachs yesterday revised their forecast to four rates hikes this year from three, which is even a more aggressive path than the fed said a month ago that rattled markets.
Moreover, it seemed obvious to most and not just economic analysts that inflationary pressures were rampant and out of control.
The Federal Reserve maintained a stance that inflation was transitory for too long and now needs to combat this rising inflation.
The only way they can do that is to raise interest rates more aggressively.
It will be a difficult balance to get right as they do not want to curtail the economic expansion that is needed for the recovery to continue.
Stock Update
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GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
11-01-2022 1805.20 1806.80 1327.36 1330.53 1593.63 1595.22
10-01-2022 1800.55 1794.20 1324.66 1325.38 1589.35 1588.41
07-01-2022 1792.20 1792.60 1322.82 1321.50 1584.30 1581.79
06-01-2022 1804.95 1789.35 1333.68 1322.15 1595.03 1580.71
05-01-2022 1818.50 1826.25 1342.96 1347.96 1607.37 1610.94
04-01-2022 1809.05 1811.40 1339.60 1339.17 1600.47 1604.90
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