Gold, Bitcoin, or Gold/Bitcoin: Part 1

Sparkling, gilded and weighty – gold has been a sign of property and wealth for thousands of years. It is considered a safe haven that retains its value even in times of economic crises, inflationary outbreaks, wars and other times when standard money transforms into near-useless pieces of paper. Much like the price of any other asset, the price of gold also rises and falls over time. But on many occasions, gold was an efficient hedge against other assets, which tend to rise just prior to collapsing.

The intriguing question we will examine across both parts of this article is whether the digital heir to the physical gold bullion has been found in recent years — with the sole nominee for this glittering prize being none other than Bitcoin; with many in the crypto community claiming that its suitability for the role has already been proven. We will examine the evidence that supports this claim, as well as that which does not.

The Age of Gold

Gold has played a major role throughout human history, and that role has become connected to Bitcoin. For thousands of years, gold was an appreciated means of payment and saving. Over the last 200 years it reached the peak of its influence, before retreating to a less senior position. After occasional implementations of gold as a denominator since the 17th century, during the 19th century, more and more countries have implemented a full gold standard – all transactions and payments were based on gold.

The gold standard forced the governments to back up all their national money to gold reserves. There was a fixed ratio between each national currency and gold (and another for silver), and there was a commitment to a free exchange between the national coins and gold. Gold became the leading means for accumulating wealth and international trade for most nations.

Gold Standardization

The result was also a standardisation of global trade according to these ratios – whether the trade was executed through local currencies that were pegged to gold, or with the international reserve currency itself – which was gold. But during and after World War I, many countries either suspended or completely abandoned the gold standard. The war situation enhanced the risk of people “running on the national currencies” and exchanging them into gold, thereby smuggling all the nation’s fortune. As a precaution, governments limited the convertibility and export of bullion and gold coins.

In the United States, the Great Recession in the 1930s triggered a partial withdrawal from the gold standard. However, despite the US government getting permission to print money without the gold ratio restrictions, on a practical level it kept a fractional reserve of gold. At that time, the United States adopted the Keynesian monetary system, which played an important role in rescuing the economy from the Great Recession. Keynesians argue that government control of the amount of money should be a tool for stabilizing the economy: In times of crisis, the government lowers the price of money (lowers interest rates or print more money) and encourages investment; whereas in times of prosperity, the price of money rises and prevents financial bubbles.

In 1933, the US government demanded that citizens with large gold holdings exchange them for dollars. Countries such as the United Kingdom and France shipped their gold to the United States as a precautionary measure, as well as further capital from Europe due to growing fears of war. The result was that while the gold standard was partially abandoned, the gold reserves of the United States were bigger than ever. Incidentally, growing reserves and fears of foreign invasion were what motivated the building of the Fort Knox bullion depository in 1936, located well within the depths of the country, and highly protected.

From the Gold Standard to the Dollar Standard

At the end of World War II and in preparation for the coming Cold War with the Soviet Union, the United States wanted to strengthen its position. To this end, in the summer of 1944, it initiated the Bretton-Woods agreements. These agreements pegged the gold to a ratio of 35 US Dollars per ounce – while all the major economies in the world pegged their currencies to the dollar. In this way, the dollar became the global reserve currency. That wasn’t just a manipulation of the growing empire, but a reasonable international economic policy, given the absolute dominance of the United States in global markets at the time. The world moved from a gold standard to a dollar standard.

Gaps in the Value of Gold

During the 1960s, growing gaps emerged between the value of gold in the free market and the ratio defined in the Bretton-Woods agreements. At the same time, Europe and Japan became dominant economic powers, challenging the exclusivity of the dollar. The agreements were fully abandoned by the United States in 1971, as an answer to the expanding costs of the Vietnam war, which had forced an increase in the money supply and a cancellation of the commitment to exchange gold for the dollar.

The gold standard epoch is still a subject of controversy among economists. The debate is focused on two alternatives: national money that is fully backed by gold, meaning a consequential limited supply, versus a government-controlled supply of money that has to adapt to the local and international markets, yet can also influence them by controlling the amount of money in circulation. These alternatives affect various issues, from international trade to prevention of inflation in a specific country.

Keynesian Principles + Gold

The intensive printing of money in the last decade as a tool to rescue the economy from the 2008 crisis, in line with the Keynesian principles that were described before, is still supported by most economists. But although many countries have maintained zero interest rates for years and have drained the economies of money, they have failed to stimulate sufficient economic growth. Another worrying result is the enormous pile of global debt, already three times bigger than global production. Doubts have arisen: Has the Keynesian system gone belly-up? It seems that the global economy is in the middle of a real scale experiment on this question.


At this point, we can look at Bitcoin. Its creation in 2009 was in the heydays of the global crisis, a fact that was also mentioned in Bitcoin’s first block, mined by its anonymous founder, Satoshi Nakamoto. In fact, part of the popularity of Bitcoin was based on the fear of collapsing markets. There is even a claim that for “hard” money such as gold – money with a limited supply – the monetary and financial world could have a new standard: the Bitcoin standard. Such a digital limited-supply currency would be in contrast to the fractional reserves and unlimited printing of money by central banks. At the moment, this seems like a bold forecast, but it deals with an essential question that goes through the comparison between Bitcoin and gold: should the control over money be fixed to an objective measure, or should it be managed by the governments. Later in this article we will dig deeper into this question.

The Comeback of Gold

Let us address the current state of gold itself. During the economic crisis of 2008, gold prices soared, but shortly thereafter collapsed sharply, as the stock and real estate markets began to rise again. In recent years, gold prices have remained relatively stable, but over the course of 2018-2019 it has jumped up about 30% (see Figure 1 below). The assessment that another economic crisis is only a matter of time is boosting the growing demand for gold. Another surprising phenomenon that has been happening lately, and supports the hike in price – or is at least benefitting from it – is the return of gold investments by governments (see Figure 2 below). 

Figure 1: Gold Prices (source: Business Insider)

Figure 2: Central Banks Government Gold Holdings (source: Bloomberg and IMF)

The reasoning behind governments beginning to buy bullion again is not just about monetary issues. The new gold trend is deeply connected to the Anti-American camp – which we could even call “Bretton-Woods reversed”. From China to Russia and East Europe – more and more countries wish to build their power against the number one superpower in the world (at least for the moment). Their motivation is a mixture between their ambitions to become superpower themselves, and a need for defence against American sanctions or trade wars.

In a decade, Russia has quadrupled the amount of gold bullion in safes. It is estimated that Russia contributes to 40% of global central bank purchases. China, the world’s largest gold miner and consumer, has joined the Russian initiative. No definitive figures are publicly available from the country’s central bank, but it is presumed that China has likely tripled its gold reserves over the past decade. 

This trend is dubbed as De-Dollarization, and the relative weakness of the American economy and currency helps those who wish to challenge it. Last year, Turkey, Iran and Kazakhstan joined the gold trend, along with Poland and Hungary – the first European countries to do so. It seems unlikely that gold will return to its position as the global reserve currency, yet its presence in international markets is definitely growing.


Click here for part two: The Characteristics of Gold and Bitcoin