The ‘B’ Word, Part 1: Store-of-value assets in a digital age

$3,623,000,000,000 — that is the increase of M2 money supply in 2020.
By now, there should be no surprise what the effect of printing 23% of total USD has on commodity markets.

Store-of-value assets Bitcoin and gold
Knut/Adobe Stock

Aluminum breached $3,000 per metric ton this week. Carbon steel price action is only now seeing moderate relief after what seemed to be a never-ending spike since August 2020.
Due to everchanging price increases, some manufacturers now face quotes that expire within 24 hours of issuance. It’s fair to say that the general MetalMiner audience has felt the pain of monetary inflation in some form or another.
M2 money supply chart
M2 money supply. Souce: Board of Governors of the Federal Reserve System (discontinued by the Fed since February 2021)

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Gold as a store of value

While MetalMiner’s expertise is primarily in base metals, we also like to keep a close eye on larger macroeconomic factors.
Avid readers of our market updates are familiar with occasional articles on oil, tariffs, and precious metals, such as gold.
During times of rapid inflation, gold has historically served as the primary vehicle among store-of-value assets for institutional investors — and for good reason.
The physical properties of element 79 make it practically indestructible. Unlike the dollar, gold also has a high stock-to-flow ratio due to steady mining activity.
Considering all of this, it’s questionable how gold has stayed relatively flat for the last year.
During the past 15 months, the dollar has trailed down nearly 5%. Meanwhile, gold has barely moved a percent compared to the price in June 2020 and previous all-time highs in 2012.
So, what’s the deal here? Is another speculative asset taking market share from gold? Or is this simply a market irregularity?
As the headline suggests, there’s a mysterious trillion-dollar elephant in the room: Bitcoin.

Rise of Bitcoin

Whether through general media conjecture or more focused education, the “B word” has no doubt permeated the minds of investors since the beginning of the COVID-19 pandemic. A 900% increase during an 18-month period is going to turn heads, one way or another.
The Bitcoin community often uses the expression “digital gold” due to the striking similarities of its properties to gold. Parallels in terms like “mining” are easy enough to spot.
But what is it that makes them similar in principle?

Historical gold price chart
Gold fixing price in London bullion market, based in U.S. dollars. Source: ICE Benchmark Administration Limited via Federal Reserve Economic Data

A brief history of metals as money

When looking at the history of civilizations, money has come in many forms: beads, salt, cattle, etc.
The core reason why all of these failed as monetary vehicles is largely due to ease of production. For example, if a small colony used rocks as a form of money, mining stone quarries could significantly increase the supply with minimal effort (i.e., inflation). As stone production was accessible even for ancient civilizations, the value of the stone is drastically devalued upon each new quarry founded, akin to the dollar devaluing upon each new dollar printed by the Federal Reserve.
As time progressed, societies introduced sounder forms of money. In fact, the term “sound money” stems from the sound gold made when dropped from a distance.
When metals became the primary usage of money, gold soon became the global monetary standard due to its core properties. Gold requires drastically more energy and resources to mine, making new production more difficult than other materials. The longevity of gold’s uniformity also provides assurance that it will not corrode or deteriorate over time. The sound money principles of scarcity and durability are the foundations of what made gold attractive as a store-of-value asset. It is also why countries have used it as a monetary standard for centuries.
However, in 1971, the United States officially got rid of the gold standard. Thus began the era of unbacked fiat currency.

Money in the digital age

The 21st century is what some might call the digital age.
In the past 10 years, we’ve witnessed the dematerialization of everyday things into a digital realm: photos on Instagram, music on Spotify, social interactions on Facebook, video on Netflix, and the power to access and distribute all of this to 7 billion people with smartphones and computers.
When Bitcoin was introduced in 2009, it began with modest roots at a market cap of only a few hundred dollars.
Today, Bitcoin stores over $1 trillion dollars’ worth of value. It is now accepted as legal tender in the country of El Salvador.
Blockchain, the technology upon which Bitcoin is founded, presents the idea of money itself dematerializing into digital, decentralized and trustless networks.
Over the course of the following weeks, we will candidly explore the similarities and differences between gold and Bitcoin across the six properties of sound money: durability, portability, uniformity, divisibility, scarcity and acceptability.
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