He cut his rather sizeable recommended allocation to physical bullion for dollar-based pension funds from 50% to 45% and redirected the five percentage points to bitcoin. In 2020 Chris Wood of Jefferies, an investment bank, and a long-time advocate of gold, signalled which way the wind was blowing. That is around a tenth of the perhaps $12trn of gold holdings, based on the World Gold Council’s estimate that a little over 200,000 tonnes of the yellow metal exists above ground. Now bitcoin and ether, the two biggest cryptocurrencies, have a combined market capitalisation of around $1.3trn, ten times what it was two years ago. The asset class was once too small to dent the appetite for gold. Cryptocurrencies, particularly bitcoin, are increasingly found in more mainstream portfolios. Yet gold’s status as the final line of defence against currency mismanagement is also being contested. People have prized precious metals for millennia.
The dollar became America’s national currency only in 1863. But gold, the argument goes, has stood the test of time. Paper money and government-issued bonds are ephemeral, and catastrophic failures of financial systems often stem from overconfidence in their safety. The answer for some investors would once have been clear. If the yellow metal is simply a less reliable proxy for TIPS, without the friendly regulatory treatment, why bother? That makes gold costlier for banks to hold, and puts it at a disadvantage compared with Treasuries. By contrast, holders of gold, like those of equities, must match 85% of their holdings with funding from stable sources. These consider government bonds to be “high-quality liquid assets”. New rules on bank-funding ratios, as part of the Basel III accord, came into effect in the EU in June and in Britain on January 1st.
Regulation has also dulled the precious metal’s sheen. If you had simply held the iShares TIPS bond exchange-traded fund in that time you would have made 35%, more than double what you would have earned by holding gold. Over the past decade, though, gold has been the less reliable of the two. Gold ended 2021 at around $1,822 per troy ounce, practically flat on the year. Despite the frenzy over inflation, ten-year real interest rates began the year at -1.06% and ended at -1.04%.
Part of the explanation for gold’s underwhelming performance last year is that this relationship continued to hold.