Gold is a commodity like bitcoin and other cryptocurrencies, Citi’s chief economist argues in a research note published yesterday, ahead of a Swiss vote that could cause the global gold price to spike.

Switzerland will hold a popular referendum on Sunday called ‘Save Our Swiss Gold’. If passed, it would mandate the Swiss National Bank to hold a fifth of its assets in gold and to repatriate its holdings from England and Canada. The bank would also be banned from selling its gold in future.

Gold prices have dropped as markets await the referendum. If the referendum is passed, gold prices will surge, although this is unlikely, CNBC reported.

Polls show that the initiative has the support of only 30% of voters, short of the 50% required, the broadcaster said.

Value by agreement

The low chance of a successful referendum hasn’t stopped the mega-bank’s chief economist, Willem Buiter, from warning that the proposal is a bad idea. Buiter spends much of the 14-page note describing the similarities between gold and cryptocurrencies like bitcoin.

“Gold as an asset is equivalent to shiny bitcoin,” he wrote in his note to clients.

Gold, Buiter continues, is unlike any other commodity, but bitcoin and cryptocurrencies bear the closest resemblance to it. Like gold, bitcoin has to be mined, is limited in supply and has no significant utility.

He also notes that both gold and bitcoin are anonymous to a degree and are “outside assets”, that is, assets that are not a liability to any other party.

Fiat currencies, he argues, are defined not by the legitimacy conferred upon them by political rulers, but by the fact that they have no intrinsic value. Instead, they are valuable only because enough people agree that they are. Therefore, gold can be thought of as a ‘fiat commodity’.

In the note, he also likens gold to the currency of the Isle of Yap: stone disks called ‘rai’ with a limited supply.

The popular online course hosted by the University of Nicosia and taught by Andreas Antonopoulos and Antonis Polemitis also uses the rai example, except it is likened to bitcoin. In both cases, the stone currency has no intrinsic value, beyond what is agreed upon by the people on the island.

Buiter writes:

“This intrinsically useless form of money … is in all essential respects equivalent to gold today. Another example would be pet rocks … another is bitcoin, a fiat virtual currency.”

Humanity’s oldest bubble

Both gold and bitcoin are, in Buiter’s view, in “benign bubbles”. The analyst argues that since fiat money is intrinsically useless, it should be valued at zero in a hypothetical economy in a state of ‘fundamental’ equilibrium. Gold’s positive value therefore shows that it is in a bubble, Buiter says.

“The gold bubble, is, of course, pretty impressive … It has had a positive value for nigh-on 6,000 years. That must make it the longest-lasting bubble in human history,” he writes.

The fact that gold is in a bubble is no indicator of its future value, Buiter says. The same would apply to bitcoin’s future price. Investors in either asset, then, should brace themselves for “an exciting ride”, he says.

Buiter writes:

“Even though I view gold as a pure bubble, that bubble may well be good for another 6,000 years … investing a vast amount of money in something whose value is based on nothing more than a set of self-confirming beliefs will make for an exciting ride.”

Since gold has no intrinsic value and it is in a bubble, the Swiss central bank would be exposed to undue risk if is mandated to hold a fifth of its reserves in gold, Buiter says.

Instead, he advocates a balanced portfolio of commodity exchange-traded funds for the bank.