‘Bitcoin is ready to replace gold,’ says Bloomberg strategist on 50th anniversary of Bretton Woods

Bitcoin (BTC) is replacing gold even as US regulators try to halt its advance, said Mike McGlone of Bloomberg Intelligence on Aug. 16.

The senior commodities market strategist credited the “digitalization of money and finance” behind the superior growth of the Bitcoin market over gold, noting that the same factors helped the US dollar gain dominance “quickly and organically” over the precious metal.

Spot gold has fallen more than 99% against Bitcoin since August 2011. Source: TradingView.com

McGlone’s comments came as conclusions from a recent three-day conference at New Hampshire’s Bretton Woods Hotel, attended by economists, macro analysts and investors, including Jurrien Timmer of Fidelity Investment, Amy Oldenburg of Morgan Stanley, among others.

Bretton Woods is popular with economists for hosting the United Nations Monetary and Financial Conference in 1944, which later led to the obligation on the United States, Canada, Western European countries, Australia and Japan to link their currencies to gold.

As a result, the new monetary system earned the title of “Bretton Woods system”.

But on August 15, 1971, the 37th President of the United States, Richard Nixon, took the dollar off the gold standard. Many economists welcomed the move, appealing to John Maynard Keynes’s landmark view that the gold standard was “a barbaric relic.”

The latest “Bretton Woods: The Realignmen” conference served as a metaphorical tribute to the end of the Bretton Woods system while focusing on emerging financial assets like Bitcoin, which threaten to shift “dollar hegemony” to become the next reserve asset global.

In doing so, Bitcoin directly challenged gold’s position as a traditional competitor to the dollar, which, as McGlone claimed, is already happening.

#Scan of money and finance is happening quickly and organically, the #dollar is gaining dominance, # Bitcoin is replacing gold and US regulation must not halt its advance – these are our key conclusions from the conference #BrettonWoods: The Realignment. pic.twitter.com/Oy11l68Oqs

– Mike McGlone (@mikemcglone11) August 16, 2021

Five Decades of Dollar Domination

Princeton University economic historian Harold James argued in his July 2021 article that “digital technologies are driving a new monetary revolution that could end the dollar’s global primacy altogether,” hinting at the role of cryptoactives like Bitcoin and Ethereum can play in reshaping the global economy.

The statements came despite the dollar’s ability to survive the worst global economic conditions in the past five decades and emerge as a global reserve asset.

In detail, the so-called ‘Nixon Shock’ in 1971 led to double digital inflation in the US, causing the dollar to fall more than 50% against the Japanese yen and the Deutschmark. But none of the currencies could replace the dollar in the race for global fiduciary hegemony.

Japanese yen performance against the US dollar after the end of the Bretton Woods deal. Source: FRED

The dollar rebounded sharply in the early 1980s. It posted similar bullish moves in the second half of the 1990s — during the dot-com boom and bust. The dollar also emerged unscathed from the 2008 financial crisis and the Covid-19-led economic crisis.

Dollar shock ahead?

But why did the dollar survive? Bloomberg opinion columnist Niall Ferguson offered three reasons in his latest report.

First, the dollar was supported by the Federal Reserve’s higher interest rate policies to reset expectations.

Crude oil quoted in BTC. Source: Ecoinometrics

Second, liberalized capital markets, led by a boom in the eurodollar and petrodollar markets, boosted the dollar’s international usefulness, prompting foreign central banks to use it to carry out international negotiations.

And third, the US government’s power to impose financial sanctions on countries it deemed unruly to White House policies — especially after the attacks on the World Trade Center on Sept. 11, 2001 — turned the dollar into a financial weapon.

But James noted that the dollar encountered unprecedented economic conditions following the Covid-19 crisis. Over the past 18 months, the US deficit has risen to 13.4% of gross domestic product (GDP), the second highest since the end of World War II.

US public debt over the past five decades. Source: FRED

He hopes to grow even further after the $1 trillion infrastructure project the Senate has just approved. The Congressional Budget Office reported that the stimulus would expand the budget deficit by another $256 billion over the next decade.

Meanwhile, another $3.5 trillion package that focuses on fighting poverty and the climate is expected to be approved by the end of this year. As a result, James noted that rising deficits have dampened the dollar’s bullish prospects in global markets. He wrote:

“Some dangers are already visible in the Treasury market, where liquidity tensions occurred (in 2020) and increased external demand […] New money, therefore, may be ending the dollar’s long period of hegemony.”

Bitcoin fights gold as an alternative to the dollar

The Federal Reserve’s loose monetary policies resulted in supersonic price hikes in the Bitcoin market, so strong bullish movements defeated gold, a traditional hedged asset.

Bitcoin climbed from $3,858 to $64,899 against rising US deficits. Source: TradingView.com

Anthony Pompliano, a partner at Pomp Investments, a longtime Bitcoin advocate, said in a note to clients that if someone holds their assets in dollars, bonds or gold, their investments will yield “negative real rates of return.”

“You essentially stick with bitcoin or equities, which leads you to consider an allocation to bitcoin given the high degree of volatility that will likely serve to outperform equities for a long enough period of time.”

Pompliano’s statements surfaced despite possible regulatory challenges for emerging digital assets, as McGlone pointed out in his Monday (16) tweet. The crypto industry has faced a wave of attacks from Secretary of the Treasury Janet Yellen, Democratic Senator Elizabeth Warren, and Gary Gensler, chairman of the Securities and Exchange Commission.

But McGlone noted that strict regulations would not be able to stop Bitcoin’s advance against gold. In addition, Liam Bussell, head of corporate communications for cryptocurrency trading service Banxa, noted that US regulators are unwilling to stop Bitcoin; they want to protect American investors from fraud.

“Illegal schemes resulted in about 82,135 cases of cryptocurrency fraud in 2020 alone,” said Bussell, adding:

“US regulators that possibly touch digital assets (CFTC, SEC and FINRA) are open to instrument diversification as long as those instruments are fair and operate transparently.”

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