How Liquid Is the Gold Market?


Mar. 1 2018, Updated 4:05 p.m. ET

World Gold Council

Bitcoin moves, on average, 5% each day, a level that is nearly as high as the realized volatility of the VIX itself (See chart below).  While this is good for investors looking for extremely high investment returns, it is hardly a characteristic of a currency, let alone a store of value, potentially limiting Bitcoin’s use as a transaction token.

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Gold is more liquid

Crypto currencies do not have a clear two-way market. Reports suggest their volume is driven by buy-and-hold investors, but, so far, they lack the characteristics common to most liquid markets with the ability to short large quantities. In addition, anecdotal evidence suggests there are high transaction costs for selling positions – both in monetary terms and in the time it takes for the transaction to settle.

Despite the current size of the crypto currency market, which has been estimated to be valued at over US$800bn, volumes are very low compared to gold and other currencies. Bitcoin trades US$2bn, on average, a day, which is roughly equivalent to the world daily trading volume of gold-backed exchange-traded funds (ETFs). This volume, however, is less than 1% of the total gold market that trades approximately US$250bn a day.

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Bitcoin is highly volatile

As you can see in the above chart, bitcoin’s (ARKW) volatility is higher than the stock market and gold. Bitcoin is still in its growing stages of becoming an asset class and is thus extremely volatile. Investment in gold is defined by its liquid nature and store of value feature. An asset’s store of value feature describes its ability to be useful in the future.

Bitcoin’s extremely volatile nature makes it difficult for it to serve as a store of value asset. Bitcoin’s trading volume is also fluctuating in nature. Gold is also volatile in nature, but its long success record keeps investor confidence intact. From January 3, 2017, to February 6, 2018, the correlation between gold prices and the gold volatility index was -0.2. A negative correlation between the two proves that they move in opposite directions. Higher volatility affects the price of gold. Gold prices are tracked by the SPDR Gold Shares (GLD), and gold volatility is tracked by the CBOE Gold Volatility Index (or GVZ).

Which feature of gold outranks bitcoin?

Another feature of gold that outranks bitcoin is liquidity. Liquidity is defined as an asset’s ability to be easily bought or sold in the market for cash, leaving the asset’s price unaffected. The chart above shows the three-month average trading volume for bitcoin and the SPDR Gold Shares ETF (GLD), which is just one gold-based ETF. The total trading volume for gold-based ETFs (DGL) (SGOL) is much higher than for bitcoin. Investors around the world buy and sell the commodity, thus making it a very liquid market for gold. Investment in gold is also done through ETFs that invest in gold mining companies, including Kinross Gold (KGC), Barrick Gold (ABX), Iamgold (IAG), and Agnico Eagle Mines (AEM).

Another demand for gold is through jewelry. China and India are the most significant consumers. Let’s look at that next.


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