As the first quarter of this year winds down, it appears that ‘scarcity’ has emerged as a key investment factor.
The contrast is sharper when viewed against the environment of ‘excess’ ─ characterized by federal cheques, central bank stimulus and unfunded tax breaks ─ that was being engineered by Central Banks and Govts worldwide at around this same time, four years ago.
Cut to present and you see a rare inversion in the investing environment: despite the twin backdrop of easing headline inflation and the highest Fed rate in 22 years:
1. Gold has spiked ─ up 5% YTD …
2. … and Bitcoin has shot up 60% YTD
Is it the scarcity of these asset classes that’s driving this surge? Or is there more to this than meets the eye?
(As an aside, there are some nice examples this year of ‘product scarcity’ driving up returns in some select equities as well this year, my favourite is Ferrari, up 25% YTD, sporting a monstrous 27% operating margin, but that’s a story for another day 😀)
On the face of it, scarcity does appear to be the reason for the surge.
Scarcity falls into 3 categories: demand-induced, supply-induced, and structural. Let’s stay here with the first 2 of those and map it to the two major success stories of this year.
Gold is witnessing a demand-induced scarcity.
But it did not provide for any military aid.
Central Banks worldwide bought over 1,037 tons of it in 2023. The final figure for 2023 was marginally shorter than the estimated 1,136 metric tonnes purchased in 2022 ─ a record year!
And this buying is not being led only by the G7 nations and PRC (Turkey was the biggest buyer in Jan 2024).
Gold’s supply dynamics hasn’t changed radically (See image, Source: Statista)
Bitcoin is witnessing a rare confluence though of demand-induced (spurred by the SEC largesse to approve Bitcoin ETFs early this year) and supply-induced scarcity (ahead of the halving, expected next month).
These arguments strongly corroborate the scarcity factor.
But what if there is a stronger signal here that is getting missed out?
Confiscation?
Central Banks worldwide have been wary ever since the US and EU confiscated Russian foreign reserves.
Nah, you say! That’s just extrapolating a one-off event.
Not really.
In another March, a couple of decades ago, in 2003, the then US president, George Bush Jr, issued an executive order to confiscate Iraqi assets held by U.S. financial institutions and vest them in the U.S. Treasury.
This perhaps explains the Central Banks’ frenzied purchase of Gold over the last couple of years.
What about Bitcoin then?
Central Banks haven’t bought in (at least not yet!). What then explains the retail/institutional frenzy around it? Is it only scarcity? Or is there a confiscation angle to this one as well?
Well, here is the thing.
Gold held by a Central Bank cannot be confiscated.
But Gold held by individuals can be.
No way, you say!
Well, it has happened.
Among others, the US did it in 1932. Australia in 1959.
Bitcoin isn’t confiscatable.
