Gold and bitcoin are both booming, and for the same underlying reason
Matthew Lynn City columnist
Following the collapse of the FTX cryptocurrency exchange, and the imprisonment of its founder Sam Bankman-Fried, all the people who had been telling us that bitcoin and the rest of the digital currencies were a giant fraud destined to collapse had a moment of vindication. And yet, even a scandal of that magnitude has not finished them off. Each time bitcoin collapses, it comes back, and it is always a bit stronger than before. It has almost trebled in value over the last 12 months and is up by 47% since the start of 2024. At more than $65,000 a coin, bitcoin is rising rapidly. After slumbering for years, gold too is starting to look a lot more exciting. The price has reached a new record above $2,100 per ounce. Measured in sterling it is also close to record levels.
The flight from government debt
Could the two be linked? Sure, there are separate explanations for the price moves. The launch of bitcoin exchange-traded funds has made it a lot easier for retail investors to buy into the digital currency, and the rate at which it can be “mined” will fall this year, limiting the supply of new coins. And the prospect of falling interest rates by the summer, along with geopolitical uncertainty, has encouraged investors to switch into gold. And yet, there is something that connects the two that may be the true explanation for why both assets are surging. They are both a protection against soaring public debt.
Over the last 15 years, governments have told us time and time again that they are stepping up borrowing to deal with a “one-off” crisis. First it was the banking collapse of 2008 and 2009, when Treasuries bailed out the banks and central banks printed lots of money. Then it was the Covid lockdowns, when the government borrowed yet more hundreds of billions. Now it is climate change, which, although we keep being told it will usher in a new golden age of investment, growth, and re-industrialisation, appears instead to involve unending subsidies. Whatever the ostensible reason, the outcome is always more borrowing, with a promise to repay when the world gets back to normal.
The result? Debt-to-GDP ratios are starting to soar. In 1990, after a decade of Thatcherism, the UK owed just 21% of GDP, and going into the financial crisis it was 50%. It has now broken through the 100% barrier, and with
