By Wolfgang Münchau , DLNews
Compiled by: Felix, PANews
Gold prices have reached an all-time high of $2,500 an ounce. In inflation-adjusted terms, it’s not yet close to where gold traded in January 1980. But it’s getting there.
Gold prices are rising as investors prepare for lower U.S. interest rates, a weaker dollar and a tech stock crash. So why isn’t Bitcoin participating in this rally?
Of course, Bitcoin is much higher than it will be at the end of 2022. However, there is a difference between the steady rise in gold prices since 2000 and the sudden surge in Bitcoin prices.
The difference is that if investors are concerned about financial instability, they turn to gold. Bitcoin is the ultimate risk-on investment, with the characteristics of a technology asset.
Not a depreciation hedge
As I pointed out in my last column , Bitcoin is not a devaluation hedge, nor is it a hedge against a tech bubble.
Several top investors, including Warren Buffett and George Soros, have recently announced that they have exited certain areas of the high-tech industry.
Hedge fund Elliott has warned that the AI craze is a hype, especially Nvidia's stock price, and as they say , AI has entered a bubble. The author generally agrees with this judgment.
The reason is that this revolution will not halt the long-term decline in productivity growth across the West. The US has managed to reverse the trend of slowing productivity growth, but if you exclude the tech sector, it is not much different from Canada or Europe.
The tech industry's productivity miracle is linked to stock markets providing cheap capital to the industry. When this flow of money ends, the productivity gap between the United States and Europe is expected to narrow.
If productivity growth is slowing, how can corporate profit growth remain high? At current valuations, they think so. In the long run, you would expect the two to be the same.
There are a number of ways to look at gross domestic product (GDP). One way is to think of it as the sum of all profits and all wages.
For most of this century, profit growth has outpaced GDP growth, and therefore wage growth, as politics and demographics favored corporate profits.
That's changing now. Until the last century, the S&P 500's price-to-earnings ratio fluctuated between just under 10 and 20. That was a period of relatively high productivity.
The current P/E ratio is 26. The Nasdaq is 40. It is hard to see how these valuations can be sustained if long-term productivity growth declines.
Highly valued technology stocks
The extremely high valuations of technology stocks and crypto assets are based on extremely optimistic assumptions about future earnings growth.
Crypto offers the promise of financial innovation, but it may take another decade or two before it becomes macroeconomically relevant.
Artificial intelligence will undoubtedly affect people's lives. But both the beautiful imagination and the panic stories about artificial intelligence are too exaggerated.
ChatGPT is useful for technical tasks, especially programming, but seems to be of no help at all for journalism.
Remember in 2017 when everyone predicted we’d have self-driving cars by now? We’re still years away from that utopia.
If we're lucky, we could have cars driving themselves on highways within 10 years.
Bitcoin boom?
So what happens to Bitcoin if the market crashes? Bitcoin is, of course, just as inflation-resistant as gold, if not more so.
Gold has supply risk. Central banks may release large amounts of gold reserves into the market. Or new gold may be discovered. But new Bitcoins will not be found, and there can be no supply shock.
Unfortunately, this doesn’t solve the problem. Currently, Bitcoin’s fate is intertwined with that of the tech industry. Many investors view cryptocurrencies as part of their tech portfolio.
Crypto assets, especially Bitcoin, have acquired the attributes of traditional investments over the years through exchanges, stablecoins, and spot ETFs.
Gold sits at the other end of the portfolio spectrum – a safe-haven, boring piece.
People don't generally invest in gold to make a lot of money. Gold investors behave more like a cult. I've always wondered why so many older male gold lovers wear bow ties. They're a strange bunch.
The cryptocurrency world has its fair share of weirdos, but it’s nothing like gold.
This also applies to the way both react to a bubble burst. In this case, liquidity will drain from the system. Traders will rush to meet margin calls.
The financial world is not as fragile as it was in 2008. But the authors argue that a tech crash of the magnitude expected would be a source of financial instability.
So when the market crashes, expect Bitcoin to crash with it. But Bitcoin and other crypto assets will eventually recover, as will some (but not all) of the currently soaring tech stocks.
The reason why the author is optimistic in the long term is that crypto assets have an important thing in common with gold: their scarcity makes them a safe long-term investment.
Even if most investors don’t view Bitcoin that way right now, that’s certainly the case.
A few years ago, I rejected the idea that scarcity had intrinsic value, feeling that it needed to be linked to something else, like industrial use, aesthetic value, or, in the case of gold, a time-tested consensus that it had value in and of itself.
Now the author has changed his mind on this point. In a world where central banks are expanding their balance sheets recklessly and governments are turning their currencies into geopolitical weapons, ensuring scarcity has value in itself.
But this is long-term. If the bubble bursts in the next year or two, I believe Bitcoin will fall with it. But gold will not.
Related reading: Bitwise: Bitcoin is an excellent long-term hedging tool, even better than gold
