Will the World’s Most Pro-Bitcoin Politician Embrace Gold?

Since Nayib Bukele became president of El Salvador, El Salvador has been in American media and global political discussion more than ever. While much of the attention focuses on Bukele’s mass incarceration of gang members and a decline in homicide of over 70%, Bukele has also drawn attention to his favoritism towards Bitcoin and how he has pushed El Salvador to embrace cryptocurrency.

Most dramatically, Bukele has proposed- fantasized?- about creating a volcano-powered haven called Bitcoin City, that would serve as an international tax haven. Bukele has also made Bitcoin recognized as a legal currency in El Salvador. The country has also begun its own sovereign reserve of Bitcoin and Bukele claims the move has been profitable for the country

But even when a president is a passionate advocate for Bitcoin, demand for gold still exists and exerts an inexorable pressure on public policy. First, while El Salvador struggled with extraordinarily high crime rates and economic turmoil in the 21st century, it sold off the vast majority of its gold holdings towards the end of 2014. But since then it has maintained its commitment to its current gold reserves. Bukele may talk about crypto as the future but it seems he and his administration realize it would be reckless to actually move away from gold reserves that can help support a country’s currency and economy.

But more directly, El Salvador is acknowledging the importance of gold by planning to ditch a landmark 2017 law that banned industrial gold mining. The law was passed under pressure by international green groups and an alliance of Central American environmentalists. But given the enduring value of gold- it’s estimated that El Salvador gold reserves are worth billions– the Bukele administration has been making moves to alter the law and create an office to facilitate mining in El Salvador.

Bitcoin, and cryptocurrency, is an intriguing phenomena but are in important ways different from traditional inflation and catastrophe. For instance, the use of most cryptocurrencies has high transaction costs, compared to trading metal coinage or bullion. The use of cryptocurrency also requires functional Internet and technical expertise. Finally, the most prominent cryptocurrency, Bitcoin, is not truly fungible. Gold, as an element, is fungible. An ounce of gold is identical to another ounce of gold. Paper currency is theoretically fungible, one dollar bill is equal to any other dollar bill. (The assumption of actual fungibility may be violated in criminal investigations when law enforcement agencies track serial numbers.)

Bitcoin is not truly fungible as many have pointed out, including the Mises Institute. Because all Bitcoin transactions are public records, anyone can trace the path of any individual Bitcoin. This has led to demand for “virgin Bitcoins” that have never been used in any transaction and are unconnected on the blockchain to any history.  This sets Bitcoin apart from gold, while gold is fungible or can be made fungible (for instance melting down jewelry), older gold can actually be more valuable such as when gold coins possess numismatic value or gold heirlooms possess historic value.

The future of gold in Latin America is uncertain but it sure looks bright.