For many years, gold has been considered a “safe haven asset.” Which means investors rush to buy gold in times of uncertainty in order to protect their wealth. But in the past few months, COVID-19 has driven unusual behaviours and movements in gold prices. |
In this blog post we explore the limitations of gold as a storage of value – especially during difficult times like a global pandemic. We ask ourselves: is gold really safe in times of crisis? And what can money or Bitcoin offer in these times of uncertainty?
Let’s begin to answer the question by taking a look at what’s been going on in the gold industry in the last few weeks.
The Rush To Safeguard Wealth
The general “rule” in times of uncertainty is that the price of gold will increase as investors look to safeguard their wealth (and as they try to escape market volatility). So, as we’d expect, the initial market “slump” driven by COVID-19 increased the price of gold. Additionally, COVID-19 shut down a lot of mines worldwide that were contributing to new gold supplies.
This lack of gold supply (as a result of COVID-19) was so significant that Max Keiser, Host of the Keiser Report, said:
“I predict — and this is not only the ultimate use case but the ultimate irony — that once people realize that they cannot get gold, they’ll start flocking en masse into Bitcoin.”
Max Keiser, Host of Keiser Report
So, with mines around the world shutting down, supply falling, and demand only rising, the price of gold continued to rise. If we look at February 9th to March 9th of 2020, the gold price rose to 7%. A lot of gold investors were ecstatic.
But, Is Gold Really Safe In Times of Crisis?
What happened to gold next is both fascinating and unexpected.
Because markets experienced a rough couple of weeks, many businesses saw themselves in serious financial situations. Many of these companies (and therefore investors) needed to support their businesses with cash in order to pay out wages, bills and suppliers that would otherwise go unpaid.
This need for cash was so strong that investors sold off their gold bars for cash. And pretty quick. As a result, gold fell 12% in just 10 days.
Then we see gold prices increase as governments offer solutions to stabilize our economies. With this new influx in cash in the economy (learn about how the Fed is willing to print unlimited amounts of money here), people are resorting back to gold.
And with demand for gold now increasing, the price of gold is also increasing. When we look back at these past few weeks, we can see that the typical behaviour we see in gold prices was turned upside its head at the brink of disaster (with the COVID-19 pandemic more precisely)
A Familiar Story?
If panicking to secure cash sounds familiar, you may have read our blog post “Egypt Is Limiting Daily Cash Withdrawals.” In a panicked attempt to save their personal wealth, Egyptians rushed to the banks to pull out 30 billion Egyptian pounds (2.7 billion CAD) – in just 3 weeks alone. As you can imagine, this was a nightmare for banks because as a general rule large banks are only required to hold 10% of their customer deposits in real cash. The rest of the money does not exist. This shows how during times of crisis, people want cash. And fast.
What Can Bitcoin Offer In Times of Crisis?
Unlike gold mines, the new supply of Bitcoin that is released into circulation remains predictable regardless of how many miners are actually mining. The supply of coins remains public knowledge no matter how high or low the price of Bitcoin goes. No matter what’s happening in the political sphere, in any part of the world, the supply and new issuance of Bitcoin still remains predictable. And predictability is a valuable trait for investors. With predictability, they can be more certain of the current and future supply of Bitcoin. Also, Bitcoin doesn’t get printed en masse when economies are in crisis. So what can we learn from all this? Perhaps that the demand for a safe haven asset is influenced (and arguably driven) by volatility in markets and the demand for liquid assets. This is where Bitcoin comes in. Bitcoin has the predictability of the supply of gold but the liquidity of cash. In other words, Bitcoin shares many of the best properties of both gold and cash. While Bitcoin, cash and gold all share the same investors seeking a stable store of value over time, Bitcoin has the most certain supply (21 million tokens in circulation, ever) and is as liquid as cash. This is why at Netcoins we believe in the long term benefits of Bitcoin. As you might expect, we’ve already seen a sizeable increase in activity on the Netcoins platform in recent weeks as people look for more “liquid” stores of value. With lightning-fast verification, an easy-to-use trading platform, and a warm customer success team, it’s never been easier to begin buying and selling cryptocurrencies in Canada.
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