GLD: $5,000 Bitcoin Could Be A 2023 Black Swan

Thesis

In investing, linear thinking is easy and pretty much useless. It only allows you to see what others are seeing too. The key is all about nonlinear thinking and seeing 2^nd order effects. And it is the thesis of this article to examine both the linear and nonlinear catalysts surrounding gold. In particular, I will use the SPDR Gold Trust ETF (NYSEARCA:GLD) and the iShares Gold Trust ETF (IAU) as examples to illustrate the role of these catalysts.

Most gold investors are familiar with the linear catalysts for a gold bull thesis such as a weakening dollar and negative real interest rates. And I will briefly recap them later in this article. However, the core thesis of this article is built around a 2^nd order and nonlinear catalyst: the price of Bitcoin (BTC-USD).

Eric Robertsen, the head of research at Standard Chartered Bank, posted a few possible black swans for 2023. The top black swan event in his mind involves Bitcoin. He sees the possibility for Bitcoin prices to crash to $5,000 from the current level. As a 2^nd order effect, such a collapse could push gold prices to $2,250 per ounce for the reasons he explained below (the emphases were added by me):

Eric Robertsen stated in the note that, considering a number of factors like insufficient funds or bankruptcies resulting in more crypto service providers packing up, more investors will likely begin to develop cold feet and will proceed to withdraw their assets. This, he said, will most likely lead to investors’ attention being directed to the good old gold. Robertson predicted that the price of gold could rise to about $2,250 for an ounce, which is about a 30% increase.

I see his reasoning as very plausible, as detailed next.

GLD, IAU, and gold: basic information

Before I go any further, let me quickly introduce the gold ETF funds (GLD and IAU) that I will use interchangeably as gold in the remainder of this article. As you can see from the following chart, both GLD and IAU are indexed to the same LBMA gold price, and investments in both funds are backed by physical gold bullions.

As you can see from the second chart below, both GLD and IAU’s price actions have tracked that of the gold prices closely. Although in the long term, some drifts can be observed, mostly due to the fees charged by the ETF funds. To wit, in the past ten years, gold prices have appreciated by 5.8% in total as seen. In contrast, IAU’s price has appreciated by 4.0%, 1.89% below the gold price itself. The price of GLD has appreciated by about 2.42%, about 3.4% below the gold price itself. The main reason for the such deviation is that IAU charges a lower expense ratio of 0.25% while GLD charges a higher expense ratio of 0.4%. And such divergence caused by the fees is the main reason that we actually hold IAU ourselves instead of GLD.

However, for a shorter timeframe (which is the timeframe that this article is mostly concerned with), the deviations between IAU, GLD, and gold prices are negligibly small. And that is why in the remainder of this article, I will treat them as interchangeable.

GLD and Bitcoin

Now back to GLD and Bitcoin. There are a few key reasons that made me think Eric Robertsen’s above thinking to be very plausible. Fundamentally, Bitcoin is regarded as a separate asset class, meaning separated from other traditional assets such as gold, equity, bonds, and et al. And as a result, with Bitcoin prices collapsing due to various reasons (such as the FTX scandal), investors will have to look for other assets. And “the good old gold” as Robertson mentioned is quite an attractive asset. It has been an attractive asset for thousands of years actually, but there are additional reasons for gold to be extra-attractive under current conditions as to be elaborated later.

To support the above reasoning, the next chart shows that GLD and Bitcoin were weakly correlated historically and are negatively correlated now. As seen, the correlation between GLD and Bitcoin prices has fluctuated in the past 10 years between 0.929 and -0.89. And the average is a very small 0.043. Currently, the correlation is at 0.436, a quite strong negative correlation.

$2,250 Gold is not that expensive

Furthermore, a $2,250 gold price is not that high at all the way I see things. Currently, gold prices stand at $1,792.7 as of this writing. So a $2,250 gold price translates into an increase of about 25% from the current level. Assuming GLD prices track gold prices precisely in the short term (as established earlier), this would translate into an increase of 25% in GLD prices as well.

As you can see from the chart below, GLD’s current price of $166 is approximately the same as it was in 2012. The cumulative inflation since 2012 is about 30%. So GLD price should be 30% higher than its current level if it had only kept pace with inflation, let alone the fact that gold price appreciation has far outpaced inflation in the longer term historically as you can see from the second chart below.

Risks and final thoughts

The main risks associated with GLD (or IAU or gold ETFs) in general are detailed in my earlier writings and are briefly recapped here:

• Gold prices are subject to large volatility, larger than the S&P500 index by a good margin.
• Neither IAU nor GLD pays dividends.
• IAU’s expense ratio is relatively lower than GLD, but the operative word is relatively here. An expense ratio of 0.25% is still high compared to other asset classes. For example, it is about 10x higher than our other core funds such as VTI (whose expense is 0.03%).
• And finally, gains from both IAU and GLD are taxed at the same maximum tax rate as collectibles.

To recap, most gold investors are familiar with the linear catalysts for a gold bull thesis under current conditions. These catalysts include the end of the dollar strengthening, negative real interest rates, and also a hedge against further escalation of geopolitical risks such as the Russian/Ukraine situation.

The core thesis of this article is built around a 2nd order and nonlinear catalyst: the price of Bitcoin. I see Eric Robertsen’s thinking about Bitcoin as a black swan in 2023 to be very plausible given the Bitcoin crash so far and the unfolding FTX scandal. I see such events creating a 2nd order catalyst to push gold price to $2,250, about 25% above its current level.

And a $2,250 gold price is not that high at all the way I see things. A 25% rally from the current level does not even make up for the inflation accumulated over the past 10 years and keep in mind that gold price appreciation has far outpaced inflation in the long run.