Tuesday, January 14, 2014

Gold And Bitcoin

Gold and Bitcoins (BTC) are both now considered "worth holding" by many, myself included.  I am in no way trying to make these two assets "equivalent", but I do want to mention some similarities and differences that show that both assets are complimentary, at least for those with the risk-tolerance to deal with BTC.

The consensus estimate is that there are some 170,000 tonnes (1000 kg / tonne) of above-ground gold in stock.  Note there are claims that there could be 1,000,000 tonnes actually in stock, but these claims are very doubtful and mostly the ideas of the somewhat conspiratorial set (Bix Weir, Yamashita's Gold, etc.).  Recapping what the top holders among the central banks own, the top 15 central banks own some 25,020 tonnes or about 15% of the total (that 15% is worth some $950 billion today).

Country
Tonnes
USA
8133
Germany
3390
IMF
2814
Italy
2451
France
2435
China *
1054
Switzerland
1040
Russia 
1015
Japan
765
Netherlands
612
India
557
ECB
502
Turkey
487
Taiwan
423
Portugal
382

* China has been importing over 1000 tonnes of gold for over a year now (as reported by Zero Hedge and others), here are three links, the first one (from Jesse/Arthur, an influential blogger) says that maybe China now has some 2710 tonnes (3rd place, the IMF gold above is in large part the USA's gold):

http://jessescrossroadscafe.blogspot.com/2014/01/china-claims-to-have-third-largest-gold.html



Re the second link above, it is interesting that Chinese gold imports dropped despite the fall in price of gold.

Also re China, I have read a couple of accounts that China may already have between 2000 - 4000 tonnes (plausible) and other reports that they may already hold 8000 + tonnes (not likely, IMO).  I have even heard that China may have been buying 1000 tonnes per month (not per year), but this seems unlikely in that world mining production is only about 2900 tonnes for 2013, source: http://www.reuters.com/article/2013/11/20/gold-mine-output-idUSL5N0J44T720131120).

Recycling of gold accounts for about 1145 tonnes (2013):  http://www.forbes.com/sites/kitconews/2013/11/14/wgc-global-gold-supply-falls-in-3q-on-less-recycling-mine-output-up/

Russia has apparently also been importing more gold, although this link shows Russia's gold holdings at 1015 tonnes (been going up since the +/- 600 tonnes from 2010):


A picture of a Russian gold bar (Reuters, via the above story, *click* any image for a better view):


Note that the above gold storage figures may not represent actual amounts of physical gold stored by each country.  Many foreign countries have gold stored at the Federal Reserve Bank of New York, which has not been audited in a public and transparent way in a long time.  The gold of the United States is mostly at Ft. Knox, but that has not had a public and transparent audit either...

The central banks are, of course, the single largest owners of gold.  The jewelry sector has a whole own even more, but much of that is "locked up" as family heirlooms, etc.  It is NOT KNOWN how much gold is owned by "FOFOA's Giants" (the Rothschilds, etc.).

There has been a lot of commentary about the drawdowns of gold from the GLD (the ETF that "holds" gold for investors who want to make a bet on gold's price moves, a bad bet ("paper gold"), IMO).  Influential gold bloggers "Turd Ferguson" and Harvey Organ follow the GLD's "gold holdings" (the GLD is a complicated instrument that does not even claim to hold any gold, they allow custodians and sub-custodians to hold it for them, hmm, could we have a problem here...?).  The GLD has had gold "leave" this year, what this all means is best left to the pros to discuss, but here is a snippet that gives a good overview as to how much gold "left" the GLD (551.70 tonnes!) in 2013 (link: http://www.tfmetalsreport.com/blog/5397/fun-gld):
We spent a lot of time documenting the pillage of the GLD in 2013. Here are links to just a few of the biggest hits:
Let's begin with the math. The GLD began 2013 with an "inventory" of 1,349.92 metric tonnes of gold. It finished the year with an "inventory" of 798.22 metric tonnes of gold. This brings the total 2013 plunder to 551.70 metric tonnes or 40.87%, roughly 17,737,567 troy ounces of gold.
***

Top producers (countries):

Top 10 Gold Producers (2011)
Production
Country
(tonnes/yr)
China
355
Australia
270
USA
237
Russia
200
South Africa
190
Peru
150
Canada
110
Ghana
100
Indonesia
100
Uzbekistan
90
Source:
goldinvestingnews.com  (2012)


Total, top 10 producers: 1802 tonnes, which looks about right considering total world mining production of about 2900 tonnes.  A key metric of gold is the stock to flow ratio: 170,000 tonnes  / (2900 mined + 500 (est.) recycled) = 79:1, very high (a well known fact).

***

Bitcoin is mostly held by wealthy individuals who were either founders or early adopters of BTC.  The largest owners are in the below table.  Note that the largest owner (No. 1 on the list) is now the FBI since "Dread Pirate Roberts" was arrested and his BTC seized.  "Bitcoin Insider" wrote me (in an update to this article) that the FBI apparently DOES have the passwords to DPR's BTC wallets, I wonder what they will spend them on...
Rank USD Bitcoins Address
1$ 122,202,420.56144,341.521FfmbHfnpaZjKFvyi1okTjJJusN455paPH
2$   94,071,849.63111,114.611933phfhK3ZgFQNLGSDXvqCn32k2buXY8a
3$   72,803,393.74  85,993.0017ewBhK712mY2E4uPAbinThibdY2LRyabd
4$   67,693,235.08  79,957.051FeexV6bAHb8ybZjqQMjJrcCrHGW9sb6uF
5$   64,343,202.22    76,000.101CbR8da9YPZqXJJKm9ze1GYf67eKAUfXwP
6$   58,815,613.41    69,471.091HQ3Go3ggs8pFnXuHVHRytPCq5fGG8Hbhx
7$   45,615,923.52  53,880.041GLEtzJ1H2zoGrUA4RMbRJam5UJSdrk6T2
8$   44,870,897.77  53,000.0416cou7Ht6WjTzuFyDBnht9hmvXytg6XdVT
9$   42,331,036.33  50,000.041P3S1grZYmcqYDuaEDVDYobJ5Fx85E9fE9
10$   37,982,934.38  44,864.211MuYkciQTfRsU94ReAe5MiAfUpCrbLBcFR
11$   35,304,054.00  41,700.0016unci4w6erqKNFYAGYTVUyJUsXV9EUH28
12$   34,706,823.17  40,994.571QAHVyRzkmD4j1pU5W89htZ3c6D6E7iWDs
13$   33,865,066.46  40,000.3114j6jLececs66ZQ8ew6vTFNiEn2NupacWJ
14$   33,864,836.84  40,000.041cXNTyXj4xPGopfYZNY5xfSM1EPJJvBZV
15$   33,864,835.95  40,000.0412HddUDLhRP2F8JjpKYeKaDxxt5wUvx5nq

Note that the above BTC dollar values are calculated at approximately $846 each, approximately at today's market value.  The above BTC is worth some $821 million or perhaps some 7% of the total market value of Bitcoin (some $12 billion or a little more).  There are about 12 million Bitcoins in circulation now, the eventual total will be about 21 million BTC, so over half of them have already been "mined".

Note also that each BTC gets a little bit harder to mine all the time.  The reward also goes down.  The system is designed so that ALL the computation in the world (working on solving BTC's "math problem"), some 30 trillion hashes per second, find approximately one solution every 10 minutes.  Success in finding such solutions can be found at blockchain.info -- right there at the top of their home page.

Bitcoin production, mostly earned by "mining" which is mostly solving the "math problem" as well as conducting some transactions works out to about 25 BTC every 10 minutes.  But, this figure (which would work out to approximately $128,000 every hour) does not seem to square what I see at blockchain.info, which typically shows the large mining pools raking in some $7,000,000 per hour in "Total Sent" to the big miners.  I invite more knowledgeable readers to take a look and comment, thank you!

Update: my Bitcoin contact "spartacus" may have resolved the issue of the high numbers coming in to blockchain.info vs. the mere 25 BTC value of each "win" by the mining pools, here is his comment (saying that blockchain includes other money vs. just the 25 BTC "won"):

Each block contains BTC transactions, _plus_ 25 new BTC.  If I send somebody 100 BTC and you send somebody else 200 BTC, then that's  a total of 300 BTC sent.  At 1000 $/BTC that would show as $300,000 on this display.  I don't know if the 25 new BTC are also included or not, but the display gives us an indication about how much "real" money (hahaha) is changing hands.

***

BTC has issues, that I would like to explore briefly.  I have already discussed some of these points re gold elsewhere at this blog.

BTC may be a compromised system, I do not think so, but there are many who are suspicious that BTC may be a precursor by TPTB to a NWO (New World Order) currency that would make anonymity impossible.  That BTC is a "test run" to accept public acceptance of an electronic currency with the end-goal of displacing cash once and for all.  While this is possible (I have NO private information than any of you do), I doubt it.  The encryption systems (three of them) appear to be very robust, particularly taken together.  Such breaches of the BTC Ecosystem have been because of sloppy security at links into the system as far as I can tell.

BTC is also criticized as "not being backed by anything", which is true, other than being backed by "math".  But, the US dollar is not backed by anything either!  (Prior to FDR, it was backed by gold 100%, and until Nixon "closed the gold window" in 1971 to foreigners wanting to changed USD into gold at $35 / oz).

For that matter, gold is not backed by "anything" either, it just is...

BTC is not widely accepted.  This is changing, about a week ago overstock.com started accepting BTC for purchases, I believe the first day they rang up $130,000 in sales.  Other companies are watching this for sure...  Once accepted, it is believed that BTC will offer a significantly lower transaction costs (less than 1%) than payments by credit cards (2% - 3%).

BTC may have competition, it even has some now.  So far, the BTC network (people who use them) is very much larger than any competitor, which is a big advantage ("network effect").  Litecoin and dogecoin are very much second string electronic crypto-currencies now.  One to keep an eye on would be zerocoin, which will apparently run on the same blockchain as BTC while offering anonymity...

Finally among risks that I can identify, there has been a lot of chatter in the BTC community about miner GHash.IO's recent hashrate production nearing the 50% amount of all attempts at solving the "math problems".  Apparently if you produce over 50% of the BTC, then you are in a position to corrupt the blockchain...  Bad!  But, GHash.IO has released a statement that they want to do nothing that would hurt the system, and some even wonder if they really are a threat...:

http://www.bloomberg.com/news/2014-01-14/did-ukrainians-almost-take-over-bitcoin-.html

***

I myself plan to probably permanently hold some BTC.  I have already made it clear that I plan to hold a fairly large (for me) position in gold.  In this section, I would like to compare the two "assets" and discuss them further.  Here is a table showing some characteristics of interest re gold and BTC:

Characteristic Gold BTC Comment
Quiet / Anonymous? Y N BTC is "fairly" quiet, but…
Quiet Transport in Qty? N Y Note 1 below
Intrinsic Worth? N N
Tangible? Y N Gold is shiny,yellow and heavy
Long History of Value? Y N
Limited Quantity? Y Y Apparently BTC is secure
Store of Value? Y N Some would say BTC is…
Currency? N Y BTC is limited but growing …
Getting More Attention? some lots
Volatile vs the US$? some very But, each has its own value…
Other Ways to Play? Y Y Note 2 below
Concentrated Ownership? Y Y Note 3 below
Widely Owned? N N Less than 3% own each…
Vulnerable in its Niche? N Y Other cryptocurrencies…
Is This Asset Diversification? Y Y Clearly both are…
Risk of Seizure / Loss? some some Note 4 below
Note 1:  Done correctly, a virtually unlimited amount of BTC could be taken out by air…
Note 2:  Gold miners (riskier IMO), and BTC mining equipment (same IMO)
Note 3:  Re investment ownership, few own either one
Note 4:  Low (IMO) risk of government seizure of both, but both can be "lost".

***

Despite the intangible nature of BTC and its recognized issues, in my opinion BTC is worthy of further study by anyone interested who has some extra money and is seeking diversification.

As with gold, I suggest following FOFOA's general advice: buy (gold or BTC) only up to your comfort level...


4 comments:

  1. Coming along nicely, and I appreciate the effort, and in a rare occurrence when discussing bitcoin, I find myself actually agreeing with everything you've written!

    Here's a link about Overstock. Apparently it was $126k the first day: http://www.wired.com/business/2014/01/overstock-bitcoin-sales/

    Cheers!

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  2. Nice summary with useful information.

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