Gold & Blockchain
Gold never changes - only the world changes around it.
I can’t remember where I heard this quote, but I’ve been thinking about it a lot lately. Gold, as an asset class, has one of the richest histories of all the earthly assets ever to have value bestowed upon them by man. As far back as we go in history, for which there is archaeological record, we find evidence of an infatuation with gold.
I was talking with a friend the other day about VanAurum, artificial intelligence, and blockchain. He asked, “Why are you building an artificial intelligence for gold? Isn’t it dead? Why don’t you just build an artificial intelligence for analyzing crypto?”
As an investor, it's perception like this that gets me excited. Successful investing is all about selling things that people want now, and reinvesting that money into something that people will want later.
There is a tremendous capital vortex that has formed around crypto and blockchain. I use capital vortex, and not “bubble”, because a capital vortex is like a bubble except that it always leaves something useful in its wake.
While every retail trader and investor in the world is focused on catching what’s left of the cryptocurrency mania, if you peel back the top layer you can see an enormous amount of activity preparing for phase 2. Phase 2 is what happens when the speculative mania in cryptocurrency ends and the world is left with an enormous technological infrastructure that is left behind by the capital vortex.
To answer this question, you need to know what will be left when the ashes clear. The answer is, what has always been there. When you peel back all the emotion, greed, fear of missing out (FOMO), hyperbole, euphoria - what's left? What’s left is a giant machine that validates transactions and contractual conditions without a third party.
It doesn’t sound as sexy, but that’s the tool we’ve built. Hundreds of billions of dollars have poured into it, along with endless hours of tech and business expertise. We didn’t build it from scratch, we upgraded another piece of technology that was left behind by the last capital vortex - the internet.
This is where an understanding of economics and monetary history serves an investor well. We live in a real, physical world. We trade real, physical things. The things people value the most, and things with value that persist through time, are all real (99% of them anyway). The entire science of economics and business theory is pursued to increase the standard of living of human society. Everything we build, if it’s to have persisting value, must help us in this pursuit or it gets discarded to the waste bin of brilliant but useless human inventions.
The internet revolutionized information flow. The blockchain will revolutionize information validation. Mass disintermediation is the next quantum leap in human efficiency and productivity. Blockchain will eliminate 99% of the friction involved in transacting in real things, displacing all who are currently employed in those frictional processes. This is the use case. People that are calling crypto currency the next money and currency are missing the bigger picture. Transacting on the block chain will give the tokens value, in the same way that the global oil trade in US dollars is what has given the US dollar its throne seat for over fourty years - people are forced to use it.
If you can understand this, then you can understand why cryptocurrency isn’t the new “money” - it’s the new platform for money. This is an important distinction. We went from exchanging cash and cheques, to using credit cards, to using debit cards, to using electronic e-transfers, to touchless payment like Apple pay, and now to…… what?
These are methods for efficiently transacting in real things. The next step, with platforms like Ethereum, is using the blockchain to verify contractual conditions have been met. At the end of the day, this is still just working to smooth the process of transacting in goods and services.
Money is a universally accepted commodity. The most desired universally accepted commodity is the best money. Blockchain is a platform that will facilitate the transmission of money. Money needs to be real, if it’s not real it will lose value over time. That’s why there are no historical instances of fiat money appreciating in value in the long term. The US Dollar is one of the longest standing fiat currencies, but it too has lost close to 98% of its value since the inception of the federal reserve. For example, College Tuition is a financial prison sentence for most people in the US, but the gold price of college tuition is the same as it was in the 1930's. What people think is an affordability crisis in college tuition is actually a currency crisis in the US Dollar. College doesn't cost more, the dollar buys less.
With fiat currency, the intrinsic value is ultimately what the commodity value is if you strip out assumptions and promises. With paper currency the commodity value is that of the paper its issued on. With electronic money it’s zero. Currency backed by assumptions and promises reverts to a zero value because assumptions and promises aren’t real either, and can’t persist in a fluid economy in the long term. Financial history has proven this, ad nauseam.
Gold is a real thing. One of the most persistent and durable real things. It’s one of the only thermodynamically stable elements that we know of in the universe, meaning in its natural state it won’t react with other elements or oxidize, decay, or rust. That alone makes it a useful commodity. It’s also one of the only biologically compatible elements, meaning you can ingest it without toxicity. That’s why it was used in fillings.
Some might be shocked to learn this, but the annual gold trade including all estimated over-the-counter (OTC) transactions, is estimated to be north of $USD 22 Trillion as of 2016. It’s the de fact backbone of the financial system and it always has been. It still is the best money - it’s value as money is immutable and inherited from it’s properties as an element. Just because it doesn’t move around doesn’t mean it’s not money.
In fact, because it doesn’t move around makes it one of the best candidates for transition to the blockchain. One of the biggest costs and concerns with gold is moving it, storing it, and keeping track of it. If there is one thing in the world, today, that could benefit from a distributed ledger and disintermediation on the scale that blockchain promises, it’s gold. The gold trade probably represents one of the best candidates for disruption with blockchain. I’m a contrarian by nature - and I think people calling for the demise of gold at the hand of blockchain aren’t understanding the situation. Blockchain is more likely to bring gold back to the mainstream and forefront than to relegate it to the dustbin of history. Blockchain is a facilitator and a lubricator. Saying blockchain will replace gold is like saying wheels will replace cars.
Because of this negative sentiment, Gold has found itself in the blind spot of investors almost seven years after making a nominal all-time high. Gold stock volatility is near all-time lows. Gold and its miners have lost the attention of speculators and traders. They’re busy speculating in cryptocurrencies and the main stock markets. With stock markets rallying to new highs everyday people see little need to be diversified in an asset that is historically anti-correlated with traditional stocks. This is what makes both gold and its miners an excellent contrarian investment. The best investment opportunities of the day are the ones nobody is talking about. The pendulum of sentiment is always swinging.
Quietly, beneath everyone’s nose, gold is undergoing a tectonic shift. On every time frame - weekly, monthly, quarterly, and yearly - the trend in gold has shifted upwards. Gold smashed historical quarterly volumes the last two quarters in a row by a significant margin. While western investors are enamoured with the stock markets, there are two billion people in the east that view gold differently and are gladly taking it off our hands at lower prices. Their economic influence is rising. Their economies are in desperate need of transactional efficiencies that the blockchain offers. A rising standard of living in the east directly equates to a rising base demand level for gold.
People should be very excited about blockchain and cryptocurrencies. Technological advances like this are what allow us to overcome the restrictions that limited resources have on our standard of living. In economics, it’s called Total Factor Productivity. Excitement, however, shouldn’t bleed into your investment decisions. Always try to keep abreast of what people are ignoring and position your money accordingly - even inside the crypto space.
Gold never changes - only the world around it does.
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