Last week the World Gold Council released a report on cryptocurrencies that described bitcoin as a competitor to gold. This is a very bad strategy if the Council wants to promote gold usage. Thanks to bitcoin, gold now has the opportunity to regain its status as currency, rather than simply a store of value. Gold may not be as good of a currency as bitcoin, but it certainly has a very bright future if non-governmental currencies end up replacing fiat.
Gold was the original decentralized currency. Just like bitcoin, much of its value comes from the fact that governments can't make more of it at will. Gold has never been able to become a global currency in physical form because it is too heavy and can't be divided easily. For gold to be a currency, it must be issued in the form of a financial instrument backed by gold, for example, a gold-backed depository receipt or national currency. Because of this, prior to the invention of bitcoin, gold's fate as a currency was in the hands of governments. This is no longer the case. The creation of new currencies is now in the hands of the markets, so if the markets want gold-backed currency, they will likely get it.
Gold receipts have already been put on a blockchain and are being traded on exchanges now - See Digix for example. If the World Gold Council wants to promote gold usage, it should promote one or more of these new gold-backed coins as currency and join with bitcoin and others in developing a global regulatory and payments infrastructure that supports decentralized payments.
Gold and bitcoin should cooperate now to develop the market and save the competition for later. The world is engaged in a two stage process to determine what currency will look like in the future.
Stage One: Markets decide whether to use non-fiat currencies. This is the current phase. It is at this stage that we will find out if the $86 trillion market for fiat currencies is actually open to new entrants like bitcoin and gold. If the markets want non-fiat currencies, we move to Stage Two.
Stage Two: The world transitions to non-fiat currencies and individual participants in the market decide which currencies they want to use.
In Stage One all non-fiat currencies, including gold and bitcoin, should be cooperating to develop the market for new currencies. Successfully moving to Stage Two will require a great deal of marketing to merchants, consumers and governments. This requires a lot of money and a coordinated effort. It would be wise for the gold community to join this effort.
So, if gold does wake up and promotes itself as currency, will the world go back to a gold-standard? Probably not. Bitcoin and other digital representations of underlying value are likely to be more appealing to people than gold because ownership can be more easily observed. However, there are a lot of people in the world who want the option of physically touching their money, so gold has a good shot at grabbing a large portion of the $86 trillion global currency market if it plays its cards right. As with everything related to new currencies, it will be fun to watch how this plays out.
About The Currency Report: The Currency Report promotes the adoption of a decentralized global currency. We provide advisory services to new currency designers and investors, including our fund, the Global Currency Fund. Read the Guide to New Currency Valuation and Design, sign up for our blogs or, for accredited investors, inquire about our fund. For more information contact Shane Hadden at firstname.lastname@example.org.