I saw someone I like and respect do a video recently about how bitcoin may not have intrinsic value, but neither does anything else – including gold. It got my wheels spinning to the point where I thought about it a lot, and well, I have to politely disagree with a commentary here on things value and worth.
First, I’m going to define the intrinsic value – maybe not the EXACT definition he had, but close. Lots of different definitions, it seems.
Wallstreetprep.com below has this in relation to stock values
But this definition has to do with valuing it in cash. I want to go a little deeper.
Wikipedia has an ethics definition….
“In ethics, intrinsic value is a property of anything that is valuable on its own. Intrinsic value is in contrast to instrumental value (also known as extrinsic value), which is a property of anything that derives its value from a relation to another intrinsically valuable thing. Intrinsic value is always something that an object has “in itself” or “for its own sake”, and is an intrinsic property. An object with intrinsic value may be regarded as an end, or in Kantian terminology, as an end-in-itself.“
This is interesting – it is valuable on its own. However, EXTRINSIC is anything that derives its value from a relation to another intrinsically valuable thing.
But it went a little more philosophical…
“Relative intrinsic value is subjective, depending on individual and cultural views and/or the individual choice of life stance. Absolute intrinsic value, on the other hand, is philosophically absolute and independent of individual and cultural views, as well as independent on whether it discovered or not what object has it.
There is an ongoing discussion on whether an absolute intrinsic value exists at all, for instance in pragmatism. In pragmatism, John Dewey‘s empirical approach did not accept intrinsic value as an inherent or enduring property of things. He saw it as an illusory product of our continuous ethic valuing activity as purposive beings. When held across only some contexts, Dewey held that goods are only intrinsic relative to a situation. In other words, he only believed in relative intrinsic value, but not any absolute intrinsic value. He held that across all contexts, goodness is best understood as instrumental value, with no contrasting intrinsic goodness. In other words, Dewey claimed that anything can only be of intrinsic value if it is a contributory good.”
If I look at gold, almost all cultures from the dawn of time admired its qualities of beauty, and it was used as a store of wealth. But the native Americans who sold Manhattan for $24 in beads valued the beads and we did not. So with the intrinsic value above, there is note that it could be culture dependent.
If you look at the value of anything, you start with – is it useful? If so, how? Like a swiss army knife is useful. A tent is useful. A sandwich is useful to keep me alive.
If you look at the three asset classes I labeled – each has a set of criteria and a scale within them.
Money – consume versus store. Better money can last longer. Eggs can be exchanged for gold or silver, but as the eggs age, their value goes down relative to gold.
Business – growth versus contraction. In this case you have reward of investment at the cost of risk of loss. A business with 20% return and strong cash flows in the US has a higher value than a business that has 10% return, weaker cash flows, and a bad jurisdiction.
Property – utility versus speculation. Where you have the reward of the investment, you have competing loss of utility.
In all cases above, all of the objects have some form of intrinsic value. It can be used to make money, live in, or consume as jewelry.
But when you get to cryptocurrency, I classified it as property.
When you look at it through this prism, you can see that there is a high risk of loss of utility, but also a high reward. It is below comic books, art, and collectibles. Meaning, the VALUE of art and the like is very subjective. Something that is a line painted on a canvas is “genius” to someone, and a line to another – zero value. When you go beyond this perversity of subjective value, you have an increasingly small number of people who find it has any value, at all. There may be a great speculative upside appeal, but there is very little, if any, intrinsic value.
I would then posit to say that if the free market value of cryptocurrency is below its cost to exist, that it then essentially has a negative intrinsic value! For argument’s sake, the way a lot of these rackets work is that blockchains need to stay up and running with computers so the blockchain can exist and verify/write to itself.
From what everyone talks about with bitcoin, the value is the network. Let’s say, for argument’s sake, that the nominal trade value of bitcoin is $3,000. However, with mining rigs, borrowing money to buy them, and electricity, the cost to produce a bitcoin may be $11,000. Likewise, running a node might pay you $20 a month if no one is using this network, but the electricity for you to run this node costs you $50. Likewise, liquidity of an object also helps to define its market value – and if there are no exchanges in existence anymore, your bitcoin may have the liquidity of your kid’s finger painting project hung up on the fridge.
Meaning – IF the value of cryptocurrency is, indeed, the networks, and the cost to run these networks is higher than the token values/rewards people get to run them, then it is possible that a situation occurs where they are no network nodes to operate the blockchain. You can then possess a key off, exchanges that no longer exist, that cannot be verified by a blockchain that no longer exists. When you look at the END STATE of cryptocurrency, it is a key to an object that may or may not exist due to market participation. The INSTRINSIC value of that key is $0, but only has value in the presence of the network nodes that can verify possession of tokens, and ONLY then has value in term of USD.
That all being said, the only way to make the value of cryptocurrency to go up is to increase the network. This requires recruitment and wild speculation – and at the very least, enough participation needs to be done in order for the item to not be negatively valued. If it costs money to operate the node and no one is willing to operate nodes, the blockchain fails. To me, this means that your “precious” is dependent on something else for any value. Without other people potentially losing money to operate a node, your “precious” would be worthless. I say potentially because if those running nodes are paid 5 tokens a month, and the value of each token is $20, this gives them $100 in token value against $30 cost of electricity to run the node. If that token value is $.01, then the node would cost $30 a month to operate and your revenue would be $.05. In this negatively operating environment, it’s only a matter of time before the blockchain network no longer exists.
Given that bitcoin has value, but is reliant on a network of participants and nodes to run at positive cash flow rates, bitcoin doesn’t have intrinsic value, but extrinsic value. Furthermore, the only way to express value is in currency – no relevance to anything else, in history. Meaning, a gold to bitcoin ratio is somewhat silly because gold can be compared to other things of intrinsic value where bitcoin cannot. A ratio, to me, that has ANY value, are items that have relevance to each other, directly. You might use a USD as an intermediary value to measure, but the VALUE is there – consider gold to silver. We use the current USD to measure the value, but if you go back 5,000 years, there is an inherent value to each other as expressed in ounces.
Before I get more haters, I respect cryptocurrency as a HEALTHY SPECULATION. Those of you who bought the dip on Tits coin, I applaud you. While I joke and chide, I am a HUGE FAN of the blockchain – however, my value of the blockchain is to deed it to an object for a very liquid and cheap way of transferring deed or title to someone. I would say without the value being attached to an object, there is no inherent or intrinsic value in the token. Likewise, with Kinesis, 1 KAU is titled to 1 g of gold. Meaning, the instrinsic value here is the gold, and the crypto is the means of currency that replaces the dollar. In bitcoin land, you want to replace the dollar (as expressed as money) with the token (as expressed as money). What I’m telling you is that the dollar is currency, and you are trying to replace the currency. Whether you print a slip of paper in a basement or print code into a blockchain, the currency itself has no intrinsic value – only what the currency was pegged to.
If you compare this to gold, gold IS the END STATE of the object. Due to it being valued as money and a store of wealth for 5,000 years, pretty much all objects we have today are valued, in terms of it. I have made a ton of content stating that gold is the center of the financial universe. What most people forget is that yes, gold goes into bricks and put in vaults, but 10% of it every year is made into jewelry – which superseded the usage of putting it into bricks in the basement. The bricks in the basement are simply a more efficient means of storing the jewelry.
If you look at gold, you can admire its beauty. You can use it with computer parts. Dental work. Jewelry. But what you can notice is that over time, gold has RELATIVE VALUE to other things.
Many reading this understand the gold to silver ratio, and for 5,000 years how it was approximately 15:1. People paid soldiers in silver. Kings owned gold. But when you look at silver, and payment for labor, you then could have relative value of silver to labor. People would then exchange labor for these pieces of silver.
When you look at a house, you see a house built with lumber, copper wires, drywall, and labor. Each of these things you could essentially break down into smaller parts and evaluate a relation to each item that each thing is made of and express this in terms of gold or silver. For example, the copper wires may have a copper to gold ratio that has fluctuated, but stayed within a sine wave over 2,000 years. Copper was also money. But its value was in cookware and weapons, and later piping and wiring. You could see perhaps a gold to lumber ratio, which Michael Gayed talks about. You know that when the lumber to gold ratio collapses, that gold may catch a bid. Why is that? There’s an abundance of lumber on the market without need for new homes, and gold is relatively undervalued to homes. Gold then plays “catch up”.
So each part of this finished good you can break down to its relative value. The intrinsic value of a home you can look at as the utility of it, but the END STATE of the components of the home can be boiled down to everything’s relation over 1,000 years to the value of gold and silver.
You see articles like, “is the inflation trade dead in gold”? Inflation was 9%, but gold was going down??? The bitcoin people were trolling hard.
But what I’m finding is that you have a complex relationship here where gold ANTICIPATES inflation. Likewise, it can also PLAY CATCH UP if inflation overshot its expectations.
Let’s go back to the vault from 100 years ago. We put the $20 in and an ounce of gold, at the time, both are valued exactly the same. You then open the time capsule, and the gold is worth 90x the $20 bill. Did it somehow gain value? No, the currency lost 99% of its value over that time due to inflating the money supply.
But that would mean Nate, that if we inflated the money supply $6T, that gold then should MOON! No. That currency created gets distributed amongst the 3 asset classes and sloshes around over time to then find where the equilibriums are.
For example, $100 is borrowed into existence tomorrow, where does it go? Well, if houses are undervalued and interest rates are low, perhaps it goes to real estate. What about if stocks are on a tear in risk on? Perhaps a lot is borrowed for margin with trading and leverage in the futures markets? You would think currency creation starts with perhaps throwing financial energy into the property or business classes. However, if you are expanding your home building company, you then perhaps need to borrow money to buy more copper, lumber, to then make houses. So you would see copper and lumber go up when currency is borrowed to make homes.
But let’s now say, for argument’s sake, you bought a piece of land for $500 and it’s now worth $50,000? Maybe you bought a home in a great neighborhood ten years ago and it tripled in value? Maybe you bought a stock at $10 and it’s now worth $200? As the economy heats up, less people want to own bonds as the game in town is throwing money into the casino of the stock market. As you sell these bonds, rates go higher, and higher, and the cost of borrowing starts to become so expensive that a peak in value is hit with property and business classes – perhaps not at the same time – but the idea here now is that there is a stalling effect in these markets.
You now want to PRESERVE these gains. You sell things, and turn it into currency. But you know my vault story, to a portion of this you put into gold. You also know that while inflation is 6%, that the demand destruction of higher interest rates will slow things and more will buy defensive yielding items like bonds, that are now priced at 5%, but you can see that in 1-2 years of time with the inflation back down to 2-3%, the VALUE of your bond will increase AND pay you a yield. So maybe you put 90% into a bond and 10% into gold where you are vaulting this 20% for 30 years, not for next week.
In this case, gold eventually gets that sloshed cash moved to it to then jump up in value and play catch up. I believe that is the move about to happen. Why? Because at some future point, interest rates will come back down, and more currency will be borrowed into existence, so gold in a sense is front running the future currency creation as well as digesting the last currency creation event.
What makes this move very interesting is that the move up from 2000-2011 was understanding that all of that currency that was created in the 1990s with the dotcom, then the amount borrowed into existence for homes would EVENTUALLY find a portion of that coming back into gold at some future point. Likewise, when QE happened, ALONG with ZIRP, it created a risk on condition that could artificially reduce the interest rates while allowing almost infinite currency creation, as long as rates were low. I believe the move down in 2011 to 2016 were people selling the gold in the vault that went up 90x (sic) and could then be used to buy undervalued homes and stocks where a condition would be created to allow businesses to almost infinitely expand. Gold started to see there were problems with this in 2016, and home values and stocks went up so much, that people started banking some of their profits.
I believe now, with the interest rates going up, it will STOP the real estate expansion and many with a LOT of equity in their homes may sell. This will reduce property values and suck up cash in the environment as many may not want to borrow at 7.5%. Likewise, if you bought stocks at $10 and they are now $200, you are realizing that your company cannot expand any more – but rather earnings will be going down and contraction will happen. You then see the PRESERVATION of wealth hitting gold and bonds.
So it is my believe that of the $6T created over the summer of 2020, the big run up we saw was anticipating some form of QE to increase the money supply, but I also believe that the amount created was so ridiculously huge and overwhelming that gold severely underestimated this, and is about to play serious catch up.
So if you had $100 in the system, at times of “risk on”, maybe $20 is in money (commodities), $35 is in property (homes), and $45 is in business (stocks, bonds). I would posit that when a risk off event happens where the future value of homes/stocks are threatened, those first to sell are most rewarded, and you then work on a re-balance, where maybe $35 goes into money, $30 goes into property, and $30 goes into homes, and maybe $5 is in currency.
As you start to see the money class grow in market cap, and interest rates stop and start to come down, money then sloshes back to the other asset classes.
The trick here is to understand that gold does not have an immediate increase with inflation or currency creation, but it is an asset class that will receive and disburse this sloshed cash back and forth. The money supply is then disbursed across these three asset classes depending on risk appetite and sentiment. I believe when there was too much cash created in error – when interest rates go up, they are meant to contract or restrict the rate of currency supply to allow asset classes to rebalance.
For example, assume you now borrow more money into existence to grow your company. You buy properties, and people buy your stock based on future earnings. However, if currency is not put into the money class with commodities, eventually, businesses will run out of materials to run their companies. When most think of gold, they think of bricks underground, but imagine you are making computer parts and gold is $1200 spot price but it costs $1500 to get it out of the ground because the equipment, labor, and materials to create the gold went up. Gold needs to be rebalanced to allow for this production, but the only way to do this to slow expansion is to make the cost to borrow become too expensive. This allows financial energy to flow back into the best money, which is then how gold goes higher.
So when you see interest rates going up now and people talk about REAL RATES – you can also see companies at 30x P/E ratios and houses in certain locations stretched in value – and many of these items will be sold to then preserve wealth, and this is when you start to see cash sloshing to bonds and gold. With $6T borrowed into existence, the question then becomes – how much might gold correct higher if the money created was 40% more than had existed in all of time? How much of that goes into bonds at 7% inflation versus playing catch up with the safe and the $20 bill?
Remember, when you put that gold in the safe with the $20 bill, it did not appreciate in a straight line. It bobbed and weaved in value relative to stocks and real estate over that 100 years.
If you see how super stretched stocks and real estate have become RELATIVE to gold, you can then imagine that in a sustained higher interest rate environment that RE and stocks might overcorrect to the downside, and gold might overcorrect to the upside.
This is how you can easily imagine $2500-$3000 gold in the next 1-2 years. It’s not that gold suddenly “got more value”, it’s that RELATIVE to other asset classes, the money asset class now needs to reload stock with low inventories and it needs to do this with higher prices to then get it out of the ground.
Obviously both gold and bitcoin have nominal values in USD. No one can deny that. But when you look at gold – you essentially have the END state of building blocks of a financial system that goes back 5,000 years and with bitcoin – the only value is in with the participation of other people on a speculative asset. To compare one to the other is silliness, as bitcoin grows in a risk on environment and will contract in a risk-off environment. Likewise, gold can anticipate future money supply – and also may correct up during a risk off IF it did not price in the amount of currency created.
I believe, strongly, that gold saw QE coming, moved up in 2020, but could not fathom this level of currency creation. Due to the stupid volume of the pump – many are about to try and preserve this financial energy the best they can and a big move to gold and bonds is about to happen. I believe due to the unwinding of the Fed balance sheet that the selling pressures on the bonds will be constant, thus interest rates may stay elevated longer and the upside in bonds may be muted- which could have for a very big overcorrection with gold.
Depending on how bad they break things, gold may then sniff out another round of QE that could be quite intense. This might also anticipate a lot more currency created.
No one knows what’s going to happen to the price of gold in USD. However, if you can understand how these things are valued – you can see gold – and other commodity money – may anticipate future currency creation (and future demand) but also correct at a later time if it didn’t bake into the cake how much was needed.
January 12, 2023 at 4:14 pm
To add, I am in agreement with Martin Armstrong in that we will probably see in increase in the gold price but also in the DOW. This would be due to the inflows of capital from other countries to the only option globally; the US. Especially from Europe as they seem to want to burn down the barn and escalate the war.