The total market capitalization of the cryptocurrency market recently exceeded $300 billion. This figure is both inspiring and frightening.

The world of digital currencies, which emerged less than a decade ago, has grown astronomically in a short period of time. The rapid growth of new cryptocurrencies in the wake of the ICO boom has interested investors all over the world. Thus, in 2017 alone, Bitcoin soared from $800 to almost $10,000. There is a month left until the end of the year, and Bitcoin has a chance to outpace the most daring forecasts of analysts and set a new record .

So it turns out that Bitcoin is the most impressive asset that is getting ready to take over the world? You can look at the cryptocurrency market with fear, but you can approach it soberly and understand that Bitcoin is only at the very beginning of its development. For now, Bitcoin is a small fish.

Cryptocurrencies vs gold

If you compare the $300 billion capitalization of the cryptocurrency market with the commodity asset market, it immediately becomes clear that digital currency is still splashing in shallow waters.

Gold, which Bitcoin is supposed to compete with, has a market capitalization of $6 trillion. In addition, it must be taken into account that only a fifth of gold is traded on the market as an investment product, the rest is in the form of jewelry, and is also located in government vaults or is still underground.

Thus, the capitalization of investment gold is about $1.2 trillion. Considering that the value of all gold is just over $7 trillion, about $1.6 trillion is used for private investment, which is more than 5 times the total capitalization of cryptocurrencies.

Let's take a closer look at the investment markets. Stocks, another investment asset, have a market capitalization of $55 trillion; another $94 trillion in mortgage securities (securitization) and $162 trillion in residential real estate.

Bitcoin is not overpriced

Of course, the price of Bitcoin is breaking records in speed, but the capitalization size is low compared to the global market. Looking at the capitalization of various investment-related areas, it is difficult to call Bitcoin a bubble. The cryptocurrency market represents only 0.3% of the total market for real estate, securitized debt, equities, commercial real estate, farmland and gold.

Based on the above indicators, Bitcoin and other cryptocurrencies can hardly be called a huge bubble.

When it comes to bubbles and overvaluation, investor and ardent Bitcoin supporter states:

“There is now $200 trillion in the world - in cash, stocks, bonds and gold. These four assets are overvalued in my opinion. If 0.5% of that $200 trillion is in Bitcoin, you will have a capitalization of $1 trillion, which will be higher than Apple Computers, the most valuable company in the world.”

The lightning growth of Bitcoin is interesting to consider from the point of view of the value of global financial assets.

Its market capitalization is $197.2 billion, which is almost the same value as the Coca-Cola Company. More than tenfold growth has already gone down in history. Bitcoin's new record, set yesterday, is $11,845. At the same time, Bitcoin's capitalization is less than 2% of any class of major assets in the financial market, and at least 400 other types of stocks have shown equal or even greater growth this year.

Here's what percentage Bitcoin makes up in the total value of the following sectors (data taken from the Money Project):

• 2.4% of $7.6 trillion. in coins and banknotes;
• 2.3% of the $7.7 trillion gold market;
• 0.25% of the global stock market of 73 trillion;
• 0.19% of the broad money supply of $90.4 trillion;
• 0.083% of the $217 trillion real estate market;
• 0.033% of the $544 trillion derivatives market.

Perhaps a more fair comparison would be to compare the overall cryptocurrency market capitalization to these asset classes. Although this would not make a difference, since Bitcoin accounts for approximately half of the total value of digital currencies.

Such comparisons can be used by critics to portray Bitcoin as a “passing fad” and question the proportionality of the fuss over such a “minor” asset.

For example, claims that Bitcoin can replace money seem premature, since it makes up less than 3% of “physical” money in circulation.

European Central Bank Vice President Vitor Constancio said Bitcoin poses no threat to monetary policy and compared it to the 17th-century tulip mania bubble.

Even if Bitcoin has made such gains this year, it doesn't look too impressive compared to stocks, as there are at least 400 stocks around the world with similar or larger gains, Bloomberg's Cameron Kreis noted.

At the same time, Bitcoin's small value compared to global assets may also be a reason for optimism on the part of cryptocurrency supporters: this means that it has sufficient room for growth and is an excellent store of value.

Recall that Jeff Curry, head of research at Goldman Sachs, said that Bitcoin is “not much different from gold” because it does not carry property obligations, unlike securities. Billionaire Mike Novogratz also stated that “gold has value solely because people say it has value [due to limited supplies]; "Bitcoin is built on an amazing technology that defines its limited supply."

Thus, “limited reserves” for some is a reason to increase their assets, and for others it is a reason to compare Bitcoin with a bubble and medieval tulip mania.

An assessment of any sector of a country’s economy is impossible in isolation from an analysis of trends characteristic of this industry throughout the world market, since individual macroeconomic factors can significantly distort the picture in individual countries in the short and medium term. In this and subsequent articles we will look at the global gold market, the dynamics of the main production and financial indicators of its largest players, the place of the Russian gold mining industry in the world, general and multidirectional trends in the domestic and global gold mining industries.

The past year has been a turning point for the global gold mining industry. Despite maintaining positive production growth rates, it is safe to say that the decline in gold prices over recent years has finally begun to affect production volumes, so far only as a result of lower capital costs and investments in the development of new deposits.

Russia is the third largest gold producer in the world, and, even despite support from the exchange rate, the dynamics of production indicators in the industry as a whole correspond to the global trend. Production throughout the country in 2015, according to the United States Geological Survey (USGS), decreased by 2% (from 247 to 242 tons).

The Russian gold mining industry is an integral part of the global gold market and is therefore subject to the influence of the same macroeconomic and market factors. Not the most stable exchange rate can seriously affect the state of affairs in the industry, but how significant such an impact can be in the conditions of equipment imports and the presence of debt obligations in foreign currency is a question without a clear answer.

To get a better idea of ​​how things are going in the world, let’s take a brief look at several of the largest gold-mining countries and companies that account for a significant portion of the precious metal’s production.

The scale of activity of gold mining companies does not always correspond to the scale of production in the specific countries to which these companies belong. In the context of globalization, gold mining has long gone beyond state borders, and therefore, before moving directly to companies, let’s look at the “political” map of world production of the precious metal.

Gold production by country of the world, tons

Gold production by the world's ten largest producing countries in 2014 and 2015. according to United States Geological Survey (USGS)

Data from the US Geological Survey on production in Russia differ significantly from the data of our Union of Gold Miners, which in 2015 reported on the production of 290 tons of gold in the country and an increase in production by 2 tons compared to 2014. However, for comparison it is advisable to use data obtained from the same source. Globally in 2015, according to various sources, there was an increase in production from 0.3 to 1%. The largest increase occurred (by chance?) in countries whose currencies weakened against the US dollar during the year: China and Australia. Russia was an exception; however, as already noted, production volumes vary from source to source.

Production growth in 2015 was the lowest since 2009, and lower exploration and development costs could help fuel this trend.

Gold production in the world 2005-2015, tons

In 2015, 6 out of 10 companies reduced production volumes, which is mainly due to low gold prices, one of the consequences of which is a reduction in capital costs and the volume of development of new deposits. The weakening of national currencies has a short-term positive impact mainly on those companies that operate within the same or closely related markets, which explains the generally worse dynamics of gold production by the largest producing companies, which, in most cases, operate in several markets.

Gold production by the world's ten largest gold mining companies in 2014 and 2015, million ounces

Nationality and geography of activities of the world's largest gold mining companies

Before touching on the financial performance of the industry's largest players, it is worth saying a few words about gold reserves. The provision of reserves affects the stability of production activities, since the low level of available reserves requires regular expenditure on exploration or acquisition of new deposits, which in conditions of low prices can become a big problem for companies.

Ten largest companies by volume of proven and probable reserves (P&P, JORC) as of January 1, 2015.

By dividing reserves by annual production volumes, you can approximately calculate how many years the company will have enough available resources. By the way, the Russian Polyus is the most secure company among the world's major gold miners.

Production volumes are not always indicative of the state of affairs in the industry, since they react rather slowly and not always unambiguously to a decrease in the price of gold and, as a consequence, a decrease in capital investments of companies. Financial indicators are much more representative. Let's focus on capitalization for now.

Capitalization of the largest gold producers, billion US dollars

Over the past 5 years, the total valuation of the largest players in the industry has fallen by half, which is explained by the strengthening of the dollar, falling gold prices and the decline in the value of assets located in markets whose currencies have been losing value (most gold is mined in developing countries).

Average annual price of gold, US dollars

The decline in industry capitalization is a natural reaction to the poor financial situation of gold miners. Thus, the world's largest gold mining company shows negative revenue growth rates for the third year in a row. In the first quarter of 2016, sales in monetary terms decreased compared to the same period last year, even despite the increase in the price of gold. The situation is similar for other market players.

The specificity of gold as an investment product affects its price, the volatility of which is much higher than the volatility of prices for most other fossil resources, which is explained by the high share of the investment component in the structure of demand.

Structure of gold demand in 2015

Investment demand in general is less stable than other components of demand. Demand from central banks of countries is also unstable. In addition to the fact that a large amount of unused metal at the disposal of central banks of countries is a potential supply, demand on their part can be not only purely market in nature, but also have political implications. Separately, it is worth mentioning about “paper” gold - trading volumes in futures for the precious metal are tens of times higher than trading volumes with the actual supply of metal, which makes prices unpredictable for the market and subject to speculation.

According to the World Gold Council, since 2014, the supply of gold has exceeded demand, and this was also the case in the first quarter of 2016. However, the prospects for decreased production and increased demand from central banks give hope for an increase in the value of the precious metal.

In addition to prices, the problem for the industry remains the reduction in capital investments when deposits with high gold content in ore are depleted. The low level of investment in the development of new deposits may, over time, lead to an increase in average costs per ounce of mined metal and a decrease in already price-pressured margins.

Next time we will take a closer look at the financial indicators of the largest companies in the global gold mining industry and their trends, and compare them with the financial indicators of Russian companies.

As with finance, the distribution of gold is not even, and some countries have significantly more resources than others. From relatively unknown Uzbekistan to one of the world's largest gold miners, South Africa, mining tens or even hundreds of tons per year is not a fantasy, especially when it comes to the countries on this list. It's time to get acquainted with the ranking of countries that produce the largest amount of gold per year.

Uzbekistan - 90 tons

Uzbekistan is one of only two landlocked countries bordering landlocked countries in the world, but that doesn't mean it doesn't have important natural resources (although there are definitely problems with exporting them ). This country took tenth place in the ranking of the most gold-mining countries, as about 90 tons of gold are mined here per year. Most of the gold that is mined here is then nationalized, and it belongs to the Navoi Mining and Metallurgical Combine.

Indonesia - 100 tons

While you can find the largest open-pit gold mine in the world in Uzbekistan, the record for the largest gold mine belongs to Indonesia. We are talking about the Grasberg mine, where 19 thousand people work. Unfortunately, it is also considered one of the most toxic places in the world. Each year, this mine releases about a thousand tons of mercury into the atmosphere in addition to the fact that 100 tons of gold are mined here annually. People who live near this mine eat fish that contain twice the recommended amount of mercury, meaning that gold mining is an extremely harmful process for the mine workers and those who live nearby.

Ghana - 100 tons

Ghana was once known as the Gold Coast for its abundance of metals. In 2011, 100 tons of gold were mined here, but the gold reserves are gradually decreasing, and today Ghana's gold reserves are estimated at only 1,400 tons. The gold mining industry accounts for about five percent of the country's GDP, and mined minerals account for 37 percent of the country's exports. Ghana is the second largest gold producer in Africa, second only to South Africa.

Canada - 110 tons

Ah, Canada, land of snow, oil and precious metals. Most of Canada's gold comes from Ontario, specifically the Red Lake mine. Canada is so patriotic about its own gold that you can purchase a Canadian gold coin for just a few hundred dollars. However, you need to hurry because the country's gold mines are among the smallest among the countries on this list.

Peru - 150 tons

Peru is the largest gold-producing country in Latin America and only the second largest in all of America after the United States. Although the country receives some monetary profit from gold mining, the process has a negative impact on the environment. Over the past decade, gold mining in this country has increased by 400 percent, and this has had an extremely negative impact on the Peruvian Amazon. The problem with Peruvian gold mines is that most of them are located on top of mountains, so the mountains themselves and the surrounding land are negatively impacted.

South Africa - 190 tons

The country that produces the most gold on the African continent is South Africa, receiving about 190 tons of gold per year. The most striking fact about gold mining in South Africa is that the country still has about six thousand tons of gold in reserve. In addition, until 2006, this country was considered the largest gold miner in the world, and although it still remains in a high position, its operating efficiency is not the highest. Gold mining is one of the key driving factors allowing South Africa to actively participate in the global economy.

Russia - 200 tons

It is not surprising that Russia got a lot of gold, since it occupies approximately one-sixth of the entire world's territory. More than five thousand tons are still in reserve, much of it has not yet even begun to be mined, particularly in eastern Siberia, but Russia has already begun importing gold to quench its thirst for the shiny metal. For example, in 2012, the country imported approximately five percent of gold to replenish its bank reserve, which stands at about 900 tons. Whether the metal is in a jar or underground, Russia definitely loves gold.

USA - 237 tons

Russia has been surpassed by its Cold War adversary, the United States, which currently ranks third in gold production in the world. Although the gold mines are concentrated mostly in Nevada (near Las Vegas) and Montana, most of the gold is located in vaults near New York, Fort Knox and other places. More than eight thousand tons of gold are stored in these vaults, owned by the Federal Reserve System and the Treasury Department. In total, the United States has approximately the amount of gold that corresponds to 75 percent of the world's gold reserves.

Australia - 270 tons

The miners of this country have been constantly working in barren soil for a long time to obtain an impressive amount of gold and take second place in this ranking. Gold production in Australia each year is about 270 tons. Two-thirds of this comes from Western Australia, from the goldfields around Perth. The continent's largest open-pit mine, called the Golden Mile, supplies the largest amount of gold for export, which brings Australia about $14 billion a year.

China - 355 tons

China ranks first in this ranking, as it does in many other rankings. This country produces about a third more than its closest pursuers from Australia. However, in addition to producing the most gold, China is also the world's top consumer of gold, which is fitting for a country that has lifted hundreds of millions of people out of poverty. Most of the gold mines are located in Shandong province, located between Beijing and Shanghai.

I recently gave a presentation to some corporate board members, and they had one major question. Why is overall gold demand weak?

They are smart people. They are successful, both professionally and in terms of investments. They even believe that one must own some amount of gold. But they were puzzled by the significant decline in demand for physical metal. They had some ideas, mostly correct, but their main concern was whether they were underestimating some critical factor that was causing other investors to ignore gold.

Their reaction was especially interesting. When they understood the reasons for the decline in physical demand, they instinctively concluded that they needed to buy more gold. Now.

See if you come to similar conclusions after reading my presentation...

Why is demand for gold weak?

Demand for physical metal has fallen for several reasons, but here are perhaps the main ones.

1. Trump. Since Donald Trump became president, purchases of American Eagles decreased by 60% (gold, silver, platinum and palladium).

Obviously, after Trump's victory, some investors felt less need for gold.

2. Cryptocurrencies. Some of the money that could have been invested in gold is instead going into cryptocurrencies. The amount is almost equal to new gold reserves for the year.

Because of this, the amount of gold and silver purchased decreased.

3. Growing stock markets. Why would the average mainstream investor, both retail and institutional, buy gold with all the hype?

Even board members were surprised to see how many new highs each market had made since the beginning of the year (and that number had increased since my presentation).

4. Arrogance. This chart is from CNN Money shows the VIX (Volatility Index), a general measure of fear in the market. As you can see, over the past 5 years it has dropped by almost a third and remains near record lows.

5 year change

If you have little fear, then you probably think that you don't need much gold.

Why are these reasons not enough?

I have pointed out why these are all actually reasons to BUY gold.

1. Trump: Not all policies will be successful (no president has accomplished all of his goals). The level of spending he expects will likely lead to inflation. The likelihood of geopolitical conflict is constantly growing.

2. Cryptocurrencies: Although some people have made money from cryptocurrencies, they are not a panacea, and you need to be careful:

• A. By any measure, cryptocurrencies are in a bubble. Every day a new cryptocurrency appears, or even more than one. The growth rate and rising prices are unsustainable. History clearly demonstrates that all bubbles burst.

• b. Cryptocurrencies are still speculative in nature. There are currently 1,147 cryptocurrencies in existence (as of October 2nd), and only a small percentage will ultimately succeed. In addition, prices are now too volatile for them to enter into widespread circulation.

• V. In most major economies, it is difficult to trade cryptocurrencies legally. China has banned exchanges (and at the same time is launching oil futures contracts exchanged for gold).

• d. Government regulation is almost certainly coming. The use of blockchain is likely to increase, but this will inevitably lead to more government intervention. Look at the response of government agencies after the first serious reports of money laundering or terrorist activity. By and large, this will eliminate the anonymity of cryptocurrencies.

• d. Finally, cryptocurrencies will not replace gold. Among other reasons, they simply don't have the market reach to do so. Here is a comparison of the value of all aboveground gold stocks (at $1,250) and the market capitalization of all currently existing cryptocurrencies.

Market capitalization of gold and cryptocurrencies

Trillion

Gold (left column), Cryptocurrencies (right column), Cost of 1,147 cryptocurrencies

Sources: LBMA, CoinMarketCap

The cryptocurrency market may still grow, but don't forget that it took gold 3,000 years to reach this level. Cryptocurrencies cannot compete with this.

3. Stock markets are overvalued. The fact that stock markets have made so many new highs in nine months is enough reason to play it safe. And the risk of a crash increases as the bubbles get bigger.

In comparison, gold is negatively correlated with stocks and is therefore an ideal hedge against inflated stock prices. Additionally, both gold and silver are undervalued, with gold remaining 32% below its 2011 high and silver 65% below its 2011 high. Insurance is now cheap.

4. A crisis is inevitable. Our research shows that monetary changes are coming, always accompanied by economic turmoil, as well as a huge loss of purchasing power in the currencies used. And that doesn't even take into account the inevitable collapse of the stock, bond and real estate markets and the inevitable recession.

The best hedge against these events is gold. This metal can equally become both an offensive investment to make a profit and a defensive hedge to protect assets.

Catalysts present

The need to have a lot of gold now is obvious.

Stock markets are at all-time highs	Correction is inevitable, it's only a matter of time. This can be significant given the size and duration of the run.
The average price of real estate in the United States now exceeds the level of the 2006 bubble.	Real estate is overvalued again. In 2008, we learned that real estate values ​​do not rise forever.
Inflation is close to historical lows	There is a high risk of higher inflation. This is the purpose of the Federal Reserve.
Bonds are in a 36-year bull market	Bonds have interest rate risk, inflation risk and, in the event of a crisis, default risk.
Nominal debt reaches extreme levels	Debt is a drag on growth. It can also lead to and worsen a crisis.
The next recession is inevitable	We are now in the third longest economic expansion since World War II.
Europe, China and Japan are still printing money	This signals that economies are not as strong as we are told.

The corporate board members I met decided to buy more gold. The risks in the financial system are clearly high, and gold is the best hedge against them. They also like that it is undervalued relative to most other asset classes.