Wolfgang Munchau is a columnist News. He is co-founder and director of Eurointelligence, and writes a column on European affairs. The New Statesman. Opinions are his own.
Gold prices hit an all-time high of $2,500 an ounce. In inflation-adjusted terms, we are still nowhere near where gold traded in January 1980. But we are getting there.
Gold prices are rising as US interest rates fall, the dollar weakens and investors brace for a crash in tech stocks. So why isn't Bitcoin participating in this rally?
Bitcoin dollar price is much higher than it was at the end of 2022. Furthermore, there is a contrast between the steady rise in the price of gold since 2000 and the more sudden spikes in the price of Bitcoin.
The difference is that gold is the asset that investors turn to when they fear financial volatility. Bitcoin is the ultimate risk-on type of investment. It has the characteristics of a technical property.
Not a debasement hedge
As I argued in a previous column, Bitcoin is not a debasement hedge. It's not even a tech-bubble hedge.
Several top investors such as Warren Buffett and George Soros have recently announced their exit from certain sectors of the high-tech sector.
We've heard a warning from hedge fund Elliott that the artificial intelligence boom is hype, and Nvidia's price in particular. He calledIn bubble land. I broadly agree with this judgment.
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The reason, I think, is that the revolution will not prevent a secular collapse in productivity growth in the West. The US has managed to buck that trend toward lower productivity growth, but if you exclude the tech sector, the US is not that different from Canada or Europe.
The tech sector's productivity miracle is largely due to the stock market, which has provided cheap capital flows to the sector. When that flow of money ends, I expect the productivity gap between the US and Europe to close.
If productivity growth is low, why should company profit growth be high? Current valuations assume they will. In the long run, you can expect the two to be similar.
There are different ways of looking at Gross Domestic Product. One way is to look at the sum of all profits and all wages.
For most of this century, profit growth outpaced GDP growth and thus outpaced wage growth, as politics and demographics favored corporate profits.
This is changing now. For the past century, the S&P500's price earnings ratio has fluctuated between just under 10 and 20. It was a period of relatively high productivity growth.
The p/e ratio now stands at 26. It's 40 for the Nasdaq. I struggle to see how these valuations can hold up if long-term productivity growth falls.
Overvalued tech stocks
High valuations of technology stocks and crypto-assets are based on overly optimistic assumptions about future earnings growth.
Crypto carries with it the promise of financial innovation, but it may be a decade or two until it becomes macroeconomically relevant.
There is no doubt that AI will impact our lives. But both its promises and scare stories are greatly exaggerated.
I find ChatGPT useful for technical tasks, especially programming, but completely useless for helping me with my journalism.
Remember when everyone was predicted to have self-driving cars in 2017? We are still many years away from that Ramarajya.
If we're lucky, we'll have cars driving themselves on the motorway in 10 years. Motorways are much easier to understand than cities.
A Bitcoin Boom?
What will happen to Bitcoin if the market crashes? Bitcoin is as inflation-proof as gold, if not more so.
There are risks to gold supply. Central banks can flood markets with their gold reserves. Or we may find new gold. We are not inventing Bitcoin anymore. There will be no supply shock.
Unfortunately, that doesn't settle the question. Currently, Bitcoin's fortunes are tied to the technology industry. Many investors consider crypto as part of their tech portfolio.
Crypto assets, and Bitcoin in particular, have acquired the characteristics of classic investments over the years through exchanges, stablecoins and spot exchange-traded funds.
Gold is the exact opposite of the portfolio – the safe haven, boring compartment.
People generally do not invest in gold to make money. Gold bugs behave like a cult. I've always wondered why so many older male gold-lovers wear bowties. It's a strange group.
The cryptoverse also has its fair share of cranks, but it's no different than the Golden Temple.
The same applies to the way both react to a bursting bubble. What happens in that scenario is that liquidity is drained from the system. Traders scramble to meet margin calls.
The financial world is not as fragile as it was in 2008. But I think a tech crash will be a source of financial instability as much as I imagine.
So when the market crashes, I expect Bitcoin to crash with it. Bitcoin and other crypto assets will eventually recover, so will some, but not all, currently high-flying tech stocks.
The reason I'm optimistic in the long run is that crypto assets share an important characteristic with gold: their scarcity makes them a safe long-term investment.
That's true even if the majority of investors don't currently treat Bitcoin that way.
A few years ago, I disagreed with the argument that scarcity is an intrinsic value. I thought it had to be associated with something else, such as industrial utility, aesthetic value, or, in the case of gold, the time-tested consensus that it is valuable in its own right.
I have changed my mind on this matter. In a world where central banks recklessly expand their balance sheets and governments turn their currencies into geopolitical weapons, guaranteed scarcity has value in its own right.
But it is long term. I believe that if the bubble bursts in the next year or two, Bitcoin will go down with it. And not gold.
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