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Around the campfire: From Stable Volcanos to Volatile Cryptos

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Just got back from a brief family break in the Canary Islands, the strip of volcanic outcrops close to North Africa’s west coast. Deciding where to go to catch some sun and warmth before the winter sets in is a bit of a nightmare right now but it seems you don’t have to quarantine after visiting these islands. Thank heaven for small mercies.

Being volcanic, although now largely dormant, these islands were perfect places for the formation of veins of gold. Hot mineral-bearing fluids flowed along zigzag cracks, the fault lines, undergoing rapid depressurisation and producing tiny veins of gold in the quartz.

Aztecs thought that gold was the “sweat of the sun”, a neat metaphor. Gold was probably more likely a result of the collision of two neutron stars, which flung out materials at colossal speed. Or it may have been through nuclear fusion in deep space and the resulting explosion of supernovas, with the debris from that bombarding the surface of the earth, with molten iron sinking into its core and taking with it the vast majority of the planet’s precious metals. It’s thought that there are enough precious metals in this core to cover the Earth in a four-metre thick layer. Too deep, too hot for exploration.

Gold is not created by human hands. Unlike paper currencies, or cryptocurrencies, gold cannot be created and its value does not depend on a promise from anyone, be they a government, central bank, or coder.

Plenty of money-substitutes have been spawned over centuries, such as dollars, pounds, euros, francs and others. These are all based on credit and are best understood as ‘debt-currencies’, forced into circulation by legal tender laws.

The next such debt-currency to arrive will be the central bank version of cryptocurrencies such as Bitcoin – there are more than 1,600 of these cryptocurrencies and the list is constantly growing.

The sheer plethora of these competing privately-developed cryptocurrencies is one of the reasons why they will never come to be universally accepted as a means of exchange or a store of value. For that to happen one of them must come to the front and dominate, crushing the competition. That’s unlikely to happen – too many individuals have too much ego wrapped up in promoting their own version.

A second reason why cryptocurrencies are unlikely to displace gold as money is that digital currencies are already being captured by central banks, who are rapidly developing their own CBDCs (Central Bank Digital Currencies). The very reason why one wants to avoid government and central banks’ control is now being adopted by those same governments and central banks. CBDCs will be a version of fiat money – legally enforced but subject to the same pressures as paper notes.

Bitcoin launched in 2009 and remained around a few dollars for its first few years. It rose to more than $17,000 in late 2017, fell to $3,212 a year later and is close to $17,000 again today. Bitcoin was always and remains today a gamble (as do other cryptocurrencies), and might become subject to tougher regulatory interference in the future, as CBDCs become more ubiquitous – governments will show little tolerance to competing financial instruments.

A final reason why gold, a natural substance, will win out in the alternative-to-fiat-money-race is volatility. If you want to be fairly certain of how much ‘value’ you own, Bitcoin is not useful, because it has been and still might be too volatile. And while it’s perhaps a pack ‘leader’ it certainly is not alone.

 

 

Until next week,

Jason

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