A fundamental rule of economics is supply and demand. What makes investment in precious metals bullion and some crypto currencies so appealing and reassuring is the fact that supply is fundamentally limited. That in essence makes the value intrinsic by virtue of rarity.
So let’s get a little context around this…
Recent estimates of the value of all financial assets is around $300 trillion. That includes things like shares and the myriad of bonds etc.
Estimates of all the gold ever mined, if somehow all available, is around 180,000 tonne or around $7.5 trillion worth. The fact is that only a small portion of this is available to ‘trade’ as such. Estimates put the total available gold for trade at around $1.5 trillion in value. In the digital asset space we have the biggest crypto by market capitalisation, Bitcoin, with a total market cap of just $186 billion and the total crypto market valued at $465 billion.
In other words, tradeable gold represents 0.5% of all global financial assets. Now ask yourself what happens if just even a small portion of that money in the ‘paper’ financial markets panics and runs for the time-proven safe haven of ‘hard asset’ gold? You cannot simply create or print more gold. You have to mine about a tonne of rock for each new 1g of gold or entice the strong hands to release their hoard with a much higher price. The graph below puts that visually into perspective.
Now put your mind to Bitcoin at just 0.06%, or all crypto currencies at 0.16% of global financial assets. Many of those crypto’s may not be worth anything intrinsically. However the likes of Bitcoin, Litecoin, Ethereum, Ripple and Bitcoin Cash are large cap, well established coins of limited supply. Bitcoin for instance will only ever have 21m coins in existence. Around 16.9m are in existence now and the process of mining more is both slow and expensive. With fixed or limited supply, if demand grows, that only leaves one other variable and that is price. Its economics 101.
2018 has the potential to be a big year for both precious metals and crypto currencies.
Unless you’ve been in a hole, markets are looking more than a little wobbly this year. Volatility, long not seen, is back. The US Fed looks determined to raise rates into a fundamentally weak economy that has been underpinned by an unprecedented amount of debt fuelled stimulus causing record high valuations. Every market crash has been preceded by rising interest rates and just this week the new chair of the US Fed said that sharemarkets aren’t on his ‘dashboard’ of considerations. This is the perfect environment for gold to shine. Gold has proven time and time again it’s value in market crashes. The table below illustrates this point in Australia. What it misses is crashes don’t care about calendars and the GFC, spanning 2 calendar years, saw shares halve and gold double.
As your uncorrelated asset gold of course is relatively cheap right now, while financial market valuations are at historic highs. Buy low, sell high is another basic tenet of finance.
Looking at crypto currencies, and further to our article last week here, we are presented with a post correction market opportunity. 2017 saw phenomenal gains as early adoption by retail investors saw the market cap for Bitcoin alone rise from $16 billion to over $221 billion. 1280% was too much too quick and it’s had the ‘correction it had to have’. What many think 2018 has in store, however, is the entry of the big money, the institutional and HNWI money, facilitated by ETF’s, hedge funds and newly created trading platforms (such as XTrade) to get around the liquidity issues posed by individual exchanges. Throw in scalability being resolved with growing Segwit adoption, The Lightning Network and Atomic Swaps this year and it could be a (re)formative year for Bitcoin alone, let alone the emergence of others vying for the title of King of Cryptos.
Ainslie Bullion is Australia’s largest bullion and crypto dealer and make buying and selling both bullion and crypto through an SMSF very easy, very legible, and very compliant. Their trademark of “Balance your wealth in an unbalanced world” is looking very attractive right now.
To learn more about investing in gold and silver download Ainslie’s “Why Buy Bullion” by clicking here.