When one searches for the phrase “gold as inflation hedge” on Google, it yields about 12,900 news results and about 167,000 videos. This shows that people are looking for investments that are safe from inflation, given that recent years have seen record-high inflation that led to government funding deficits and expensive prices of basic goods and services that people are having a hard time affording.
Searching the phrase “bringing back the gold standard,” on the other hand, has more results to show for with 35,200 news articles and 20.4 million videos. This points to the fact that many are exploring bringing back the gold standard because the current fiat system is not working. The use of the gold standard was completely discarded in 1971, when the fiat currency replaced it.
“After the gold standard was abandoned, the dollar became both money and currency. It was a double tragedy. Not only is the value agreement (the substance of money) imposed by the government rather than determined by a free market, but also the distinction between money and currency is destroyed to further invite abuse,” Zeming M. Gao, a patent attorney, business strategist and tech investor, explained on his blog post about tokenized gold.
This abuse is evidenced, not only by record-high inflation rates in the past two years, but also by how the U.S. government had to suspend its debt ceiling until 2025. The debt ceiling is set in order to control the amount of money the U.S. can borrow through bonds. In suspending it, the government can borrow more money, so it can pay for its debts. In essence, it incurs more debt in order to pay off its past debts.
This, in turn, prevents the U.S. from defaulting on its debts, meaning that it would declare that it does not have the ability to pay its debts anymore. This will naturally cause pandemonium in the world economy, especially with the U.S.’s role as a reserve currency. The U.S. claims that it has never defaulted in its history. However, renowned economist Peter Schiff begged to differ.
“We defaulted on our obligation to redeem our notes in real money. Because federal reserve notes were obligations to pay gold, and when you tell your creditors, ‘We’re not going to pay you what we told you. We’re going to give you nothing for your notes,’ that is a default,” Schiff pointed out during his presentation at the London Blockchain Conference 2023 about tokenized gold.
“So, we defaulted in 1971, and so the world has been operating on a fiat system where one fiat currency is backed by another fiat currency. But ultimately, there’s nothing backing up the entire system,” he added.
As a result of this, the U.S. is now running an annual budget deficit in excess of $2 trillion, while trade deficits exceed $1 trillion a year. And in June 2023, the United States finally suspended its debt ceiling until 2025. This is because the national debt has reached the ceiling set at $31.4 trillion.
“That’s how dysfunctional the American economy has become under this system. Because the ability to create the reserve currency out of thin air means that Americans don’t have to produce in order to consume. All we have to do is produce money—just print paper, and we could exchange that for the goods that the rest of the world produces. And that enables Americans to live beyond their means,” Schiff pointed out.
Cryptocurrencies and Gold as Inflation Hedges
Uncontrollable inflation and increasing national debt have many people putting theories out there about what could replace fiat currency. Attention became focused on cryptocurrencies, especially since it is increasingly being used worldwide. They were often speculated to be an inflation hedge that the world could certainly use.
This is because enthusiasts insist that while miners can continue mining to produce an unlimited supply of gold and Central Banks can continue printing as much fiat currency as they want, almost all cryptocurrencies have a limited supply. The logic behind this argument is because the excessive supply of money naturally leads to inflation. So, because cryptocurrencies have a limited supply, then it can actually control or prevent inflation.
BTC, which is probably the most popular cryptocurrency, was often referred to as digital gold because of its presumed store of value and role as an inflation hedge. However, people have come to realize that BTC does not function both as a store of value and inflation hedge. First, it does not have real value because it is not backed by a physical asset like gold, and second, its price volatility is something that cannot be controlled—much like inflation.
“In reality, [BTC’s] recent performance as an inflation hedge has been rocky, at best, with cryptocurrency nearly 67% off its all-time high in November 2022. The past two years have presented the first test of [BTC] as an inflation hedge during a period of sharply rising prices, and it’s proven to be anything but digital gold,” business author and journalist Wayne Duggon wrote in a Forbes article published in May of this year.
Duggon’s article also explored gold as an inflation hedge. But while its price increased by 14% in the period of November 2022 to February 2023, Duggon was quick to dismiss it as an inflation hedge. This is because according to the Consumer Price Index (CPI), the price of gold only increased at an average of 1% between 2021 and 2022—the years when inflation reached an annual average of 4.2%.
So, if cryptocurrencies and gold separately cannot become an inflation hedge, then will combining the two produce the superior money the world is in dire need of today? Experts will quickly answer, “yes.” But how exactly do you combine gold and cryptocurrencies in a way that it can perform more efficiently than fiat currency?
Tokenized Gold as Superior Currency
Combining gold and cryptocurrencies to make it truly become superior currency can occur through tokenization. But what is tokenization and how can it make currency more efficient? Tokenization, simply put, is “a process that converts the rights and benefits to a particular unit of value, such as an asset into a digital token.”
These digital tokens live on the blockchain, which is a decentralized and distributed ledger that records and stores data as transactions in an immutable, chronological and timestamped manner. This not only allows for no data loss and an extremely tight defense against hackers and fraudsters, but also provides privacy, security and easy verification and authentication of transactions.
These capabilities then make it a more efficient currency because it makes it a lot easier yet secure to transmit money even across borders. And if tokenization occurs on a scalable blockchain, then it can increase its block sizes and transaction capacity on demand. This not only means that it can scale to meet global demands for the tokens, but it also allows for transaction fees to be reduced to very tiny fractions of a cent.
Now, when gold is tokenized, a unit of value is assigned to a token. Very similar to the gold standard, one token can be worth one ounce of gold, for instance. And as Schiff succinctly put it, “when you marry [gold] to the blockchain, you now have a monetary system that is far more efficient than the monetary system that the world had prior to going off the gold standard in 1971.”
Tokenized gold is then superior money because it is backed by a metal with real and proven value, hence, it has store of value. And because it is built on blockchain, its technology lends tokenized gold the qualities that make it a more efficient and effective medium of exchange, making it a superior currency. Because each country has a limited supply of gold, it will act as a better inflation hedge than anything else.