In 2020, the price of gold has jumped over 30 percent from $1,517 per ounce on January 3, 2020 to over $2,000 per ounce on August 6, 2020. The spike in the price of gold isn’t yet at the level reached in the 2017 Bitcoin boom when the price of one Bitcoin rose from $999 on January 1, 2017 to $3,270 on August 6, 2017, an increase of over 300 percent. The demand for gold in 2020 is driven in part by investors seeking a perceived safe harbor from uncertainties in traditional asset classes caused by the COVID-19 pandemic and, in part, by speculation. But similar to the Bitcoin bubble, much of the recent demand for gold as an investment comes from retail investors.
In the wake of the COVID-19 crisis, Congress passed The Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In addition to providing low interest loans, the CARES ACT relaxed mandatory distribution requirements on retirement plans to provide additional liquidity to taxpayers. Gold and other precious metals dealers have targeted retail clients, including many senior citizens, by encouraging investors to speculate on the price of gold by converting their retirement savings into investments of gold or silver coins, self-directed gold individual retirement accounts (IRAs), or make leveraged purchases of physical metals.
In 2018, after the Bitcoin bubble, the Commodity Futures Trading Commission (CFTC) Office of Customer Education and Outreach published a number of customer advisories on Bitcoin and other virtual currencies. One CFTC Customer Advisory, titled “Beware of “IRS Approved” Virtual Currency IRAs”, encouraged investors to be cautious of sales pitches touting “IRS approved” or “IRA approved” virtual currency retirement accounts. On August 4, 2020, in light of the recent gold boom, the CFTC issued a new Customer Advisory intended to educate the retail investors about unregistered gold and precious metals dealers touting the changes in the CARES Act rules regarding retirement account distributions. The CFTC warned consumers that, even if precious metals dealers call themselves “IRA experts,” such dealers may not be licensed or registered to provide investment or trading advice to retail customers. Furthermore, investing in gold or leveraged purchases often includes expensive monthly fees for administration, handling, storage, or insurance; purchasing collectible coins with high markups and low liquidity. The CFTC’s Customer Advisory reminds investors that retail commodity transactions entered into on a levered or margined basis must result in actual delivery within 28 days. If the transaction does not result in actual delivery of the commodity, the transaction is subject to the dealer registration requirements and anti-fraud provisions of the Commodity Exchange Act (the CEA). The CFTC clarified its position on retail commodity transactions under the CEA by issuing final interpretive guidance regarding the term “actual delivery” in August 2013 (the 2013 Guidance). The 2013 Guidance describes what transactions feature actual delivery of the commodity. For example, the 2013 Guidance makes clear that actual delivery involves transfer of title and possession of the commodity, but that book entries at a custodian where a purchase is “rolled, offset, or otherwise netted with another transaction” do not constitute actual delivery. The 2013 Guidance is similar to the CFTC’s March 2020 final interpretive guidance (the 2020 Guidance) on the meaning of actual delivery in the context of margined or levered transactions with retail investors in Bitcoin and other virtual currencies. Pursuant to the 2020 Guidance, levered or margined transactions in Bitcoin with retail investors must feature the transfer of possession and control of the entire quantity of virtual currency. According to the 2020 Guidance, the Bitcoin or virtual currency must actually move back into the retail investor’s own wallet within 28 days for the transaction to avoid becoming subject to the CEA requirements.
Based on the rapid price increases, retail investor speculation and CFTC focus, perhaps gold is the new Bitcoin. Gold and Bitcoin have much in common from an investment standpoint. Neither gold bullion nor gold coins have much utility beyond jewelry manufacturing and, to a lesser extent, dentistry and electronics. A retail investor could more easily purchase goods and services with Bitcoin than with gold coins. Gold, like bitcoin, only has the value people ascribe to it. Despite the similarities between gold and Bitcoin, whether the potential for fraud or utility of the asset, regulators have been slow to permit retail investors to access Bitcoin as an asset class. If gold is indeed the new Bitcoin, retail investors should arguably have access to the same range of investment vehicles in virtual currencies as they do for gold.