Goldman Sachs goes for gold when assessing bitcoin

When it comes to the key characteristics of money, cryptocurrencies such as bitcoin lose out to the centuries-old gold standard for intrinsic value, gold itself, concludes US bank Goldman Sachs.

“Precious metals remain a relevant asset class in modern portfolios, despite their lack of yield,” report authors Jeffrey Currie and Michael Hinds said.

“They are neither a historic accident or a relic,” they concluded.

The twin drivers maintaining gold’s preeminence as a global asset are wealth and fear, they added.

This is because at times of great uncertainty and price volatility, gold is seen as a safe harbour for investors looking for reassurance and safety of assets, making fear the key short- to medium-term driver, the authors said.

In the long-term, wealth is the driver, the report stated, especially in emerging markets such as China, where rising income levels bring gold within reach of a wider group of investors, maintaining prices.

Bitcoin has performed phenomenally well this year, from a base of around US$1,000 to its present high of almost US$6,000.

However, the analysts expressed caution at this, pointing out that bitcoin volatility is seven times that of gold.

One area in which bitcoin out-performed gold is in the area of portability as bullion is heavy and impractical to move around the world, and also subject to import tax in some jurisdictions such as India.

‘Bitcoin is easy and fast to move’

By contrast, bitcoin is easy and fast to move, without significant associated costs, although report authors pointed out that the cryptocurrency is vulnerable, being potentially open to theft by hackers when stored in digital wallets on computers, tablets or smartphones.

There are also regulatory risks associated with digital currencies that could cause their value to plummet, such as recent steps by China outlawing initial coin offerings (ICOs), as reported, effectively banning trading in the currency.

Another point in gold’s favour is that, like all precious metals, it is in finite supply as a resource, ensuring that its value is likely to hold due to rarity.

Bitcoin, by contrast, could easily be supplanted by other cryptocurrencies, meaning that it has no inherent rarity.

Goldman Sachs ‘open-minded’ about bitoin

That said, Goldman Sachs seem less hostile to bitcoin than, for examply, JP Morgan, whose chief executive Jamie Dimon, pictured above, described bitcoin as “a fraud” and said he would fire any employees trading the digital currency, as reported.

“I’d fire them in a second,” Dimon said. “For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.”

By contrast, Goldman Sachs seem to be more agnostic about the merits of bitcoin, with some news outlets reporting rumours that the Wall Street bank is considering setting up a trading operation that focuses on bitcoin.

And two weeks ago, Goldman Sachs chief executive Lloyd Blankfein tweeted: “Still thinking about #Bitcoin. No conclusion – not endorsing/rejecting. Know that folks also were skeptical when paper money displaced gold.”

 

ABOUT THE AUTHOR
Eugene Costello
Eugene Costello has been a journalist for some 20 years, and has written for a wide variety of UK and international newspapers and magazines.

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