GOLD
THE GREAT GOLD VS CRYPTO DEBATE
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BY ANDR EW NAYLOR, WOR LD GOLD COUNCIL R EGIONAL CHIEF EXECUTIVE OFFICER, APAC AND PUBLIC POLICY
The recent performance of cryptocurrencies coupled with year-to-date outflows from gold ETFs has led to questions about whether cryptocurrencies are displacing interest in gold. Andrew Naylor, regional CEO APAC (ex China) of the World Gold Council, explains why this is not the case.
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OLD AND CRYPTO CURRENCIES ARE FUNDAMENTALLY DIFFERENT ASSETS A question often asked is the impact of cryptocurrencies on gold as an asset class, and whether interest in crypto will displace interest in gold. The short answer is no – they are fundamentally different asset classes. Gold is also a physical asset and by definition crypto-currencies are not. But arguably one of the most significant differences is the very different nature of demand for both assets. Unlike crypto, gold has a very diverse demand profile and use-case(s). It also has intrinsic value. If you look at the sources of demand for gold over the period 2010-2020, investment demand accounts for approximately 42 per cent of annual demand, jewellery 34 per cent, central banks 17 per cent, and technology about 7 per cent. Each of these sectors of demand has
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different drivers – jewellery and tech demand often increase in times of economic expansion. Investment demand is driven by uncertainty, and central bank demand by a combination of both. The unique and diverse nature of demand for gold, underpinned by different drivers, means gold performs differently from other asset classes, including crypto. The result is that gold is often not significantly correlated to most other assets, particularly in downturns, making gold a potential diversifier. There are other factors that distinguish gold from crypto – its liquidity, volatility profile and its role in a portfolio. Crypto assets can be volatile and are not without risk so an argument can be made that the higher the exposure to crypto, the greater the need for an asset that can mitigate risk such as gold. It is therefore important to consider the different roles
that cryptocurrencies and gold play. Earlier this month bitcoin futures were launched. Whilst an interesting development, they are structurally different to physically-backed gold ETFs. The bitcoin ETF does not hold the underlying asset – it is based on cashsettled bitcoin futures. Physical gold ETFs hold the underlying asset – physical gold. The final point to consider on cryptocurrencies is the regulatory framework. This is constantly evolving and is not yet settled, adding another element of risk to the cryptocurrency market. SO IF CRYPTOCURRENCIES A R E N O T D I S P L AC I N G G O L D, W H AT A R E T H E R E A S O N S F O R GOLD’S MIXED PERFORMANCE S O FA R T H I S Y E A R ? It has been an interesting year for gold. From last year’s record high gold price and inflows into ETFs, gold has so far had
