“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”
— Warren Buffett
Sandy Weill is the legendary banker who in 1998 bluffed the government into repealing the Glass-Steagall Act by merging Salomon Brothers with Citibank in blatant defiance of the law.
So when we heard Weill would be visiting the Citi trading floor I worked on in the early aughts, it was a major event.
An office-wide email instructed us to clean up our desks, look presentable and be better behaved than normal. (It was a little Potemkin Village-y.)
I was also personally forewarned that the head of equities, Jim O’Donnell, would be bringing Weill by my desk on his tour of the trading floor.
I still don't know why I was so honored, but my guess is that O’Donnell deemed me the trader least likely to say something embarrassing to the great man.
He deemed wrong.
Weill asked me about the market, which I was warned he was likely to do, and I was ready with a pre-packaged response.
He caught me off guard, however, with his second question: "What's gold doing?"
I had been on trading desks for about ten years at that point, and it was the first time anyone had ever asked me about the price of gold.
I could not have told you the price within $1,000.
Worse still, I didn't even know how to look it up. Who knew the Reuters code for gold!???!?
So I did what comes naturally to a trader in that kind of sticky situation: I lied.
After gazing searchingly at my Reuters screen for a moment, I replied, "It's up small, Mr. Weill."
Gold is a niche interest in TradFi because it’s not very interesting.
It's inert. It doesn’t do anything.
There are no earnings reports. No roadshows.
Gold pays no investment banking fees. Or dividends.
You can't even take it out for lunch!
Most importantly: Clients don't care.
Wall Street’s clients don’t care because gold does not naturally accrue value over time.
You don’t get paid to wait in gold. In fact, you have to pay fees to store it.
You can’t lend it out because it’s too heavy to move around much. And it's not useful collateral anyway.
Gold doesn’t become more scarce via buybacks or mergers.
Instead, there’s always a lot more of it in the ground, waiting to be dug up. (And really a lot more of it on asteroids!)
TradFi asset managers prefer equities for all of these reasons.
Equities naturally accrue value over time.
If they go down, you can wait it out.
They have profit margins that get paid out or reinvested.
They buy back shares, cut costs, invent new markets, merge and get taken over.
For all these reasons, equities are generally a better investment than gold: Because they don’t just store value, they grow it.
Are there times when gold is better than equities? Sure.
Is now one of those times? Entirely possible.
But that’s trading, not investing.
And that is why, so far, the vast majority of TradFi converts to bitcoin have been traders, not investors.
I mention this because crypto natives always seem a little perplexed as to why TradFi hasn’t yet wholesale abandoned equities for bitcoin.
If they’re not buying bitcoin, it must be that they don’t “get” bitcoin. And as soon as they do get it, the floodgates will open, and they will all be rushing in to buy at much higher prices.
But I’m here to tell you they understand it fine. They’re just not interested.
They are not interested because bitcoin is a store-of-value, and they’re not in the business of storing value.
They’re in the business of growing value.
Making Buyers and Sellers
Digital gold is better than analog gold for reasons that don’t need repeating to sophisticated newsletter readers with an appreciation of permissionless assets.
That appreciation is clearly spreading, as the events of the past week are already winning converts to the bitcoin cause.
But bitcoin also shares one notable disadvantage of gold: It costs money to store.
If you have a big enough pile of gold, you’ll have to pay someone to guard it.
We similarly pay miners to guard our bitcoin.
That service is paid for in new bitcoin, which costs us about 1.7% per annum (in dilution).
Those new bitcoin then get sold to pay for miners’ costs: Hardware rigs, electricity and taxes are all denominated in fiat.
Miners paying bills are, therefore, a natural source of selling pressure on bitcoin.
There is a second source of supply to consider, as well: Paying interest on dollar-denominated loans.
Michael Saylor does good work in evangelizing for bitcoin, but when he buys it with borrowed money, he brings dollar liabilities into the system: Those loans will eventually have to be paid off, presumably by selling bitcoin.
Another bitcoin champion, El Salvador President Nayib Bukele may be doing the same. The interest payments on his proposed Bitcoin bond would be paid for by selling the bitcoin he just bought.
These may seem like small hurdles to you, but they are worth keeping in mind when bitcoin is not doing what we think it should do (go up every day).
We all think of bitcoin as a store-of-value, but the truth is that it slowly burns value.
I expect that new buyers will more than offset that slow burn — but we have to make those new buyers by convincing investors of bitcoin’s utility.
TradFi asset managers — accustomed to growing value in equities — will be hard to convince.