By Mark Cudmore, former Lehman FX trader and currently macro strategist at Bloomberg Markets Live
The Gold and Bitcoin Bull Run Is Just Beginning
A long-term trend of investor demand for stores of value has only just begun, with policy doors now open that won’t be easily closed again. That’s a huge mark in favor of gold and Bitcoin.
Something changed this year. After sparking years of heated debates on the sidelines, the once-seen-as-preposterous concept of Modern Monetary Theory is being adopted by stealth with barely a whimper of protest. That means a new market paradigm that brings an end to the “default” state of U.S. real yields being positive.
It’s beyond the remit of this piece to discuss the pros and cons of MMT; I’m just drawing attention to the fact that it’s happening and suggesting that those who fail to adapt their investment approach accordingly will regret it. If orthodox economic theory is being upended, then conventional market approaches also need to be reexamined.
The U.S. has three choices in the coming decades for how to deal with the government’s extraordinary debt burden:
Default on its debt;
Inflate it away;
Impose sufficient austerity to slowly pay it down.
Option 1 is politically unfeasible and completely unnecessary given that the U.S. controls the dollar printing presses. The decades ahead might bring the occasional nod toward option 3 but that is politically unsustainable for more than a few years, especially now that both sides of the political divide have shown a willingness to significantly increase borrowing.
That leaves option 2 — already the assumed base case for many investors in the wake of the 2008 financial crisis. The difference now is that recent actions have rendered moot any further debate. The market consequences — which investors have yet to fully register — include that the default state for U.S. real yields will now be negative until the financial system gets completely overhauled. Or collapses.
And as the volume of negative-yielding global debt rises, so crypto and precious metals remain preferable non-negative-yielding assets…
Yes, this will erode the value of fiat currency, but not at the rapid pace that too many people rush to conclude. That’s a valid tail risk but not the base case as there are so many structural disinflationary forces and policymakers have many levers to manage the process. It’s far more likely that the devaluation of fiat currencies happens gradually over many years — and what that means is that stores of value will retain a premium.
As for what assets make a good store of value, the phrase itself is a misnomer. Just like beauty, value is in the eye of the beholder and perception of it is all that matters.
For much of history, gold has retained a premium far beyond any practical use. Apocalyptic forecasters recommending gold, guns and tinned food haven’t thought through the logistics or usefulness of lugging bullion through zombie-infested wastelands, but it’s precisely this illogical thinking that imbues gold with a special status as a store of value.
Bitcoin engenders a similar perception of value. It’s poorly constructed to be a viable transactional currency and has no inherent value, which has left me cynical of its long-term prospects. But, helped by the network effect and even “official validation” by the likes of the CFTC, which sees it as a tradeable commodity, I have been convinced it has reached sufficient critical mass to be perceived as “digital gold” and thus a popular store of value in the years ahead.
Of course, there are other adequate stores of value. And, most importantly, I’m not suggesting there won’t be short-term deflationary shocks to the financial system that will prompt massive corrections in gold, Bitcoin and their alternatives. It’s just that we now know the eventual policy response will be to print enough money into the system until real yields are once again negative, only reinforcing the long-term underlying demand for those perceived stores of value at the expense of fiat currencies.