Gold vs. Bitcoin: One World, Two Systems

In 2024, the prices of two assets in the global investment market have repeatedly hit new highs, which has been ridiculed as "the speed of updating the research report title cannot keep up with the speed of price record highs".

What are these two assets? That's right, gold and Bitcoin.

Behind the continued surge in these two assets is the change in their long-term narratives. In this lecture today, we will discuss one by one, what changes have occurred in the narratives of gold and Bitcoin, and can this change continue in the future?

The logic of gold price fluctuations: anti-inflation, risk avoidance

Let's start with gold.

First think back, why do we buy gold? Most people will blurt out: gold preserves value and resists inflation.

Yes, in the past 100 years of gold investment history, the ups and downs of gold prices mainly come from the two factors of "anti-inflation" and "risk aversion".

Here we look back at the history of currency:

In human history, gold has served as the world currency for thousands of years, and its function as a "value storage and means of payment" has been deeply rooted in people's hearts. After the Bretton Woods system in 1945, the US dollar became the world currency, but at that time the US dollar was still linked to gold. It was not until 1971 that the US dollar and gold were decoupled, and gold withdrew from the world currency stage. But as the most popular currency in human history, gold has become a hedge against the US dollar monetary system -

Whenever there is inflation expectation or world turmoil, people will doubt and waver about the current monetary system, and often rush to the "white moonlight" of the past world, gold.

For example, after the Internet bubble in 2000, after the financial crisis in 2008, and after the COVID-19 pandemic in 2020, the Federal Reserve has vigorously cut interest rates and implemented quantitative easing policies, and the price of gold will rise at this time. In late October 2024, the price of gold exceeded $2,800 per ounce, which is also related to inflation expectations. At that time, Trump's chances of winning the election increased, and his policy proposals, including tariffs, fiscal expansion, and tightening immigration, would increase inflation, so the market responded to this expectation in advance. Similarly, Brexit, Sino-US trade frictions, Russia-Ukraine conflicts, Middle East disputes... As long as there are signs of unrest, the price of gold will also rise, which is the same as the old Chinese saying "antiques in prosperous times, gold in troubled times".

Figure Gold price trend chart in the past 20 years

New narrative of gold after 2022: island chain

It seems that the rise in gold prices in the past two years is related to the world turmoil brought about by the conflict between Russia and Ukraine and Trump's victory, which is still a risk-averse logic. But in fact, under the similar surface phenomena, the underlying logic has already been subtly different.

In the 4th lecture of "Xiang Shuai China Wealth Report (2020-2021)" in 2021, I predicted that gold would have a large return (e.g. not less than 20%) in the next two years. At that time, my logic was that the inflation expectations would be brought about by the loosening of monetary policy after the epidemic. To date, the increase in gold has far exceeded my expectations, but frankly speaking, the anti-inflation factor of such a huge increase in gold may be weaker than I expected at the time (because Bitcoin, as digital gold, plays a part in the anti-inflation function), but the factors of the world political structure in the island chain are much stronger.

"Island chain" is a term I proposed in 2022. It describes the situation that after the Russian-Ukrainian conflict, the global integrated flat market has become a situation where large islands are independent of each other, but there are still intricate chain connections between capital/trade/manpower, just like what former French Prime Minister Dominique de Villepin described as "one world, two systems" - From the monetary level, this means that the original status of the US dollar as the single world currency has undergone subtle changes.

During the Russian-Ukrainian conflict, the United States froze Russia's foreign exchange reserves of 300 billion US dollars. Because the foreign exchange reserves of various countries are mainly US dollar assets, the central banks of many countries naturally have the need to "diversify and diversify risks". There are not many major assets independent of the US dollar system, and gold is an important one. Since 2022, the super buyers in the global gold market have become governments of various countries, and the demand for gold purchases by central banks of various countries, including China, India, Turkey, and Russia, has increased fivefold.

Table: Changes in gold reserves of various countries

In short, the world is moving from "globalization" to "island chainization", and asset allocation has also begun to evolve under the logic of "one world, two systems". The rise in gold prices is the embodiment of the new narrative under the island chain political ecology.

The 2024 World Gold Council survey shows that 29% of central banks intend to increase their gold reserves in the next 12 months, the highest level since the survey was launched in 2018; 81% of central banks expect global gold reserves to increase in the next 12 months.

These data and surveys show that the "island chain narrative" has become a basic support for the medium- and long-term gold price. In addition to anti-inflation and risk aversion, the rise and fall of gold prices may be closely related to the global "island chain" trend. If this trend continues, then the gold price will have a certain support. Of course, inflation and risk aversion still have an important impact on the gold price: for example, after Trump takes office, if the Palestinian-Israeli issue and the Russian-Ukrainian conflict can be resolved, then it may be a negative impact on gold.

Bitcoin: From resistance narrative to transaction narrative

After talking about gold, let's look at Bitcoin.

I need to remind you that it is illegal to trade Bitcoin in China. But you may need to understand that in the global investment market, in a sense, Bitcoin and gold are assets of the same nature: first, they are both supplements and substitutes for the current sovereign credit currencies; second, they are not supported by cash flow, and their value is mainly based on people's common beliefs, that is, relying on narratives.

When the narrative of gold changes with the "island chain" of the world's political landscape, the underlying logic of Bitcoin has undergone a major change. The US dollar system has shifted from "restriction" to "incorporation" of Bitcoin, and Bitcoin has become a "mainstream asset" in the digital dollar system from a "marginal person" in the US dollar system.

Two years ago, in the 6th lecture of the 2022 "Xiang Shuai China Wealth Report (2022-2023)", I once described in detail that the US government's attitude towards Bitcoin took a 180-degree turn between 2020 and 2022: from "illegal, speculative, and inefficient" to "innovative and important". This shift means that the US dollar system has shifted from "restriction" to "incorporation" of Bitcoin, incorporating the digital encryption ecosystem into the US financial regulatory system. Federal Reserve Chairman Powell said, "Bitcoin is like gold, existing in digital form" - this means that the US government's calculation is that in the digital dollar system, there is no existence as independent of the dollar system as gold. As digital gold, Bitcoin has gradually become an important part of the hegemony of the "digital dollar".

In 2022-2024, the United States has pressed the accelerator key of "incorporation". The digital encryption ecosystem that has grown wildly for more than ten years has gradually been incorporated into the US financial regulatory system, and the credit of the US dollar has also been "extended" in the digital world: in January and July 2024, the US Securities and Exchange Commission (SEC) approved the Bitcoin spot ETF and Ethereum ETF for the first time, respectively, paving the way for many US institutional investors to allocate crypto assets.

In November 2024, Trump's victory in the election brought this "incorporation" narrative into a carnival. During the campaign, Trump used the title of "cryptocurrency president" to win more support. Many of the staunch supporters of Trump's team, including Musk, Peter Thiel and other bigwigs, are supporters of the digital encryption industry. This is also the reason why the price of Bitcoin has directly exceeded $100,000 from less than $70,000 since November.

Of course, the price volatility of Bitcoin is much greater than that of gold. It is not uncommon for it to double in a few months, and it is not uncommon for it to be halved in a few months. Like all financial assets, the price of Bitcoin will overreact and of course over-adjust. But overall, under the narrative of "incorporation", the US financial market's positioning of crypto assets is no longer "alien", but digital gold in the "digital dollar system".