Gold and cryptocurrencies How gold’s role in a portfolio differs from cryptos About the World Gold Council Contents The World Gold Council is the market development organisation How gold’s role in a portfolio differs from cryptos 2 for the gold industry. Our purpose is to stimulate and sustain Gold and cryptos are fundamentally different 2 demand for gold, provide industry leadership, and be the global Gold has a dual nature 2 authority on the gold market. Gold is a unique and scarce natural element. 3 We develop gold-backed solutions, services and products, based Gold production and ownership is diverse 4 on authoritative market insight and we work with a range of Gold and crypto prices behave differently 4 partners to put our ideas into action. As a result, we create structural shifts in demand for gold across key market sectors. We High potential reward brings added risk 4 provide insights into the international gold markets, helping people Diversification is not just about low correlation 5 to understand the wealth preservation qualities of gold and its role Bitcoin has yet to prove itself as a safe haven 6 in meeting the social and environmental needs of society. Improving risk-adjusted returns 6 Gold’s liquidity helps investors manage risk 7 Based in the UK, with operations in India, the Far East and the US, the World Gold Council is an association whose members An evolving regulatory environment 8 comprise the world’s leading gold mining companies. Gold is proven and established 9 For more information Research and Strategy Adam Perlaky Louise Street [email protected] [email protected] +1 212 317 3824 +44 20 7826 4765 Bharat Iyer Mukesh Kumar [email protected] [email protected] +1 221 317 3823 +91 22 317 3826 Johan Palmberg Ray Jia [email protected] [email protected] +44 20 7826 4786 +86 21 2226 1107 Krishan Gopaul [email protected] +44 20 7826 4704 Juan Carlos Artigas John Reade Head of Research Chief Market Strategist [email protected] [email protected] +1 212 317 3826 +44 20 7826 4760 Distribution and Investment: Claire Lincoln Matthew Mark Head of Sales – EMEA Head of Sales – Americas [email protected] [email protected] +44 20 7826 4788 +1 212 317 3834 Fred Yang Sheela Kulkarni Head of Sales – China Head of Sales – India [email protected] [email protected] +86 21 2226 1109 +91 22 6157 9114 Jaspar Crawley Head of Sales – ASEAN [email protected] +65 6808 6761 Gold and cryptocurrencies | How gold’s role in a portfolio differs from cryptos 01 How gold’s role in a portfolio differs from cryptos The recent rapid ascent of cryptocurrencies over the past year has captured the attention of investors. Often, investments in cryptos1 are equated to investments in gold. Despite some apparent similarities, we believe that gold stands apart from cryptocurrencies, both fundamentally and practically. Our analysis demonstrates that gold: • is a tangible asset with a unique dual nature as an investment and consumer good • is highly liquid and less volatile • is a proven long-term strategic investment • may mitigate the risks that cryptos could bring to portfolios. Gold and cryptos are In particular: • gold sources of demand are more diverse (p.3) fundamentally different • supply and ownership of cryptocurrencies are more concentrated (p.4) The advent of blockchain and cryptocurrencies has • cryptos have mostly contributed to portfolio performance catalysed innovation in the financial industry. Their through returns but have added significant risk (p.6) proliferation and recent exponential price increase have • gold is a high-quality liquid asset and portfolios with captured investors’ imaginations. However, the cryptos may benefit from higher allocations to gold (p.6-7) developments in blockchain and cryptocurrencies do not • evolving regulatory frameworks may change the value imply that cryptocurrencies are a substitute for gold. proposition of cryptocurrencies (p.8). The argument that gold and cryptocurrencies such as Gold has a dual nature 2, 3 Bitcoin are similar appears to stem from perceptions of: The sources of demand for gold are very different from • their limited supply those for cryptocurrencies. For more than 2,000 years, gold • their role as alternatives to fiat currencies. has served as means of exchange and been used as a store of value. 4 Gold is owned by institutional and individual However, this comparison is simplistic and overlooks investors, as well as by central banks (Figure 1). fundamental differences between gold and cryptocurrencies – not only in terms of their market dynamics but also in terms of their performance and the role they play in portfolios. Unlike cryptocurrencies, gold is also a consumer good. 1 We use cryptos interchangeably with cryptocurrencies through the note for based on blockchain technology – a type of database that allows “digital stylistic purposes. information to be recorded and distributed but not edited”. Investopedia, 2 Bitcoin first appeared in the literature in late 2008 – likely due to the Blockchain explained, November 2020. disenchantment many market participants had with the financial system 3 Throughout this report, we primarily use Bitcoin for comparison in terms of during the Global Financial Crisis – and used the open-source software performance and other metrics as it the cryptocurrency with the largest released in early 2009. Bitcoin was initially viewed as a means to increase market capitalisation and with the longest available historical data. trust in transactions, reduce costs and bypass private ledgers. Since then, 4 See Money and gold. thousands of cryptocurrencies and, more generally, crypto assets have hit the market. While all these can vary in many ways, they are generally built Gold and cryptocurrencies | How gold’s role in a portfolio differs from cryptos 02 Figure 1: Gold’s demand is linked to investment and Chart 1: Growth in above-ground stocks of gold consumption remains below the equivalent growth in Bitcoin Composition of average annual net demand* Annual rate of growth of gold and Bitcoin through mining* Annual growth 12% 10% 8% *Based on 10-year average annual net demand estimates ending in 2020. It 6% excludes over-the-counter demand. **Net jewellery and technology demand computed assuming 90% of annual 4% recycling comes from jewellery and 10% from technology. 2% Source: Metals Focus, Refinitiv GFMS, World Gold Council Jewellery is an integral part of the gold market. A large 0% portion of gold demand is deeply connected to cultural and 2016 2017 2018 2019 2020 religious beliefs, especially in India and China. Gold is also Above ground gold growth Mined Bitcoin growth widely used in high-end electronics – including for *As of 31 December 2020. components in computers, mobile phones and other Source: Bloomberg, bitcoin.org, World Gold Council. technology (which, interestingly, are needed to ‘mine’ cryptocurrencies). Gold is a unique and scarce natural element This sets gold apart from many assets, giving it a unique One of the most referenced similarities between gold and dual nature that historically has allowed it to perform well in cryptocurrencies is scarcity. Gold’s above-ground stocks times of economic stress as well as benefiting from long- grew at a rate of 1.7% through mine production in 2020 term economic expansion. This underpins gold’s strategic (Chart 1) – and that rate has not changed much over the role in portfolios as a source of returns as well as an past 20 years. 6 The stock of Bitcoin is currently increasing effective diversifier. 5 at an annual rate close to 3% and is engineered to slowly decline to zero growth around the year 2140. In contrast, cryptocurrencies are digital (non-tangible) assets and, in our view, their current primary – if not only – While both gold and Bitcoin are finite, Bitcoin’s pre- source of demand is for investment (Table 1). For example, determined number of units in existence may seemingly Bitcoin’s recent performance and volatile behaviour may create an advantage. However, gold’s relevance has been suggest that it primarily responds to price momentum, cemented by a combination of elemental physical and which is usually linked to more speculative than strategic chemical properties, as well as a good balance between positioning. availability and scarcity. Thus, while there exist other metals and precious metals, such as silver, palladium or Table 1: Gold has more diverse sources of demand platinum, gold was by far the preferred asset used in than cryptocurrencies currency standards and has remained a key component in Stylised overview of sectors of current demand for gold foreign reserves even after the end of the Bretton-Woods and cryptocurrencies* system. Jewellery Technology Investment Central banks In contrast, nothing prevents additional – and possibly more Gold efficient 7 – cryptocurrencies from replacing existing ones or Cryptocurrencies X ** X potentially adding to the overall total supply. The crypto *As of 30 December 2020. space has exploded in recent years, and it is estimated that **Some cryptocurrencies that can be used as ‘smart’ digital contracts may be there are more than 10,000 cryptocurrencies available purchased for applications in technology. through various online platforms. 8 Source: World Gold Council 5 The relevance of gold as a strategic asset (US edition), February 2020. 7 The top 12 cryptocurrencies and what they are—and aren’t—good for, MIT 6 Source: Metals Focus, Refinitiv GFMS. Technology Review, April 208. 8 As of 25 January 2021. See CoinMarketCap.com. Gold and cryptocurrencies | How gold’s role in a portfolio differs from cryptos 03 At present, Bitcoin has benefited from its name recognition Chart 2: Sharp increases in Bitcoin ownership have and large network effect, but the space is highly coincided with significant selloffs in recent years competitive, and it is still too early to know how this issue Price of Bitcoin compared to daily unique users* may play out.