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BookmarkRussia’s war in Ukraine has created what some economists see as irrevocable shifts in the geopolitical landscape; lines are being drawn among allies and opponents that won’t easily be undone.
Fund managers at VanEck looked at how this new landscape will impact financial markets and the makeup of reserve currencies as nations look to diversify their holdings. Taking the current trend to an extreme conclusion, Natalia Gurushina and Eric Fine, the authors of the latest report, see significant upside for Bitcoin and gold.
“The bottom line is that the upside for gold and Bitcoin is potentially dramatic. Specifically, the framework estimates gold prices of around $31,000 per ounce and potential Bitcoin prices of around $1,300,000 per coin,” the analyst said in their report. ” Precious metals are the original reserve asset, but cryptocurrencies are a possible addition/replacement/portion.”
Gurushina and Fine noted that this is the first time in recent history that significant economic sanctions have been placed on a world power.
“Something big has happened, and we are attempting to quantify its impact,” the analysts said. “China is watching and sees a U.S./Eurozone/Japan that has gone ‘nuclear’in its economic war with Russia. ‘Stories’about the future of money are interesting, but if one agrees that this is a potentially new paradigm, an attempt at quantification is needed.
VanEck developed its gold and bitcoin price scenarios by comparing current gold reserves with the global money supply: M0 and M2. The asset management firm noted that there are a lot of central banks that don’t hold any gold. For example, the implied price of gold in Japan would be nearly $200,000. For the United Kingdom, the implied gold price would be more than $133,000.
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“On a by-country basis, Japan is off the charts. It has a lot of money and very little gold,” the analysts said. “The U.K. is another developed market (DM) with very low gold reserves relative to money liabilities. China’s gold reserves also appear low relative to their money liabilities.”
Using the same calculations based on global M0 money supply, VanEck sees an extreme Bitcoin price of $1.3 million. At the same time, using calculations based on global M2 money supply, the price jumps to $4.8 million.
Although Bitcoin has significantly more upside than gold, VanEck said that central banks would probably prefer the precious metal over the digital currency.
“Our opinion right now is that gold is the easiest thing for central banks,” the analysts said.
Gurushina and Fine reiterated several times in the report their outlook is based on extreme scenarios to establish a starting point and a discussion on the evolution of reserve currencies. They noted that probabilities need to be heavily weighed against their forecast.
“We believe most investors will and should use expected value frameworks to make these numbers practical. For example, an investor who sees a 10% chance of gold becoming the reserve asset might say that our “extreme scenario” price of $31,000 per ounce represents a practical price target of $3,100 per ounce. They may see that as an attractive upside relative to current prices,” the analysts said.
