Very few people understand that once you deposit your money into a bank account, it is no longer your legal property. The deposits may be insured but there’s nothing to prevent the government from confiscating money held within the banking system. The most famous recent example of this was the “bail-in” carried out by the government of Cyprus, where funds were diverted from individual bank accounts to ensure the government didn’t default on its debt.
This isn’t strictly a third world phenomenon either. The US government, via the IRS, has regularly seized bank accounts belonging to small businesses and individuals who made deposits of less than $10,000, but broke no laws. This practice, known as civil forfeiture, has been denounced by Attorney General Eric Holder, but it’s difficult to reverse precedent of this nature.
Gold is one of the only assets to function as a medium of exchange and store of value over several thousand years. Physical bullion is also much easier to keep away from prying governments, especially when it’s outside the banking system. The problem, however, is that gold is cumbersome to store and not an efficient payment method in small transactions.
On the opposite end of the spectrum, digital currencies like Bitcoin are easy (often free) to store and convenient for even the smallest of transactions. The knock on digital currencies is that they don’t have an established track record of storing value. In fact, even though gold has been mired in a bear market since 2011, the yellow metal has dramatically outperformed Bitcoin over the past 16 months. One ounce of gold now buys 4 Bitcoins. At this time last year, one ounce of gold was only worth 2 Bitcoins.
One of the only similarities between digital currencies and gold is that they largely function outside the banking system. The lack of real alternatives for depositing excess savings is what props up the current banking system in the first place. China, which overtook India to become the world’s largest buyer of gold in 2013, is a great example of this financial repression. Real deposit rates in China have been negative in 15 of the past 22 years, so there’s little opportunity cost in owning gold. The Chinese also appear to have an affinity for digital currencies. A study from Goldman Sachs reveals that 80% of Bitcoin exchange volume is being conducted in Chinese Yuan (CNY), up from 50% at the beginning of this year. Bitcoin has long been seen as a loophole around China’s vaunted capital controls, and it’s proving to be effective considering the Chinese government banned banks from handling Bitcoin transactions in 2013.
Fortunately, enterprising companies like GBI are stepping up with new products that combine the perks of gold and digital currencies. Co-founder Savneet Singh pointed out in a recent interview that “Gold is the oldest currency but you can’t really spend it. It just sits there and that’s one of the problems with it.” GBI has created a new digital gold-backed currency called “XAU,” which gives consumers the ability to use allocated-gold as money for payment at over 80,000 merchants that accept Bitcoin. In essence, technology is now available that enables individuals to operate on their own gold standard.
It may seem as though products like this are designed for gold bugs and technophiles, but there’s reason to believe they’ll play a big part in our monetary future. Last November, former Federal Reserve Chairman Alan Greenspan said, “Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.” If developers have melded the monetary properties of gold with the convenience of digital currencies, we could be looking at a viable alternative to the modern banking system. Of course there are drawbacks, like the inability to earn interest, but with real interest rates below zero in much of the world, the opportunity cost is non-existent. Even if interest rates start to rise in a material fashion, which is unlikely anytime soon, the lack of counter-party risk will make digital gold irresistible for many looking to protect their savings.