Gold has been in severe decline throughout the fourth quarter of 2016. This correction is predicated upon dollar strength, higher bond yields, and the opportunity cost of a rising equity market.
Meanwhile, the gold-based ETFs undergo large capital withdrawals, further punishing holders of the yellow metal.
However, there is a factor in the gold decline that is not getting enough attention: Bitcoin. The governments of China and India have restricted their citizen's investment in gold to such a degree that people are abandoning it and turning to cryptocurrency as the primary alternative investment.
Ever since the election of Donald Trump, the Chinese yuan has been in a nosedive, and the nation is facing severe capital flight as investors convert their money into dollars, euros, and gold. On top of this, since gold is traded in dollars, imports of the metal deplete China's dollar reserves, further weakening the yuan.
In response to these challenges, the Chinese government has restricted importation of gold. But the fundamental challenges faced by the Chinese economy have not been addressed, leaving investors in the nation skittish about holding paper money and unable to buy as much gold as they would like.
Across the globe, Bitcoin use is surging while retail interest in precious metals declines.
The evidence suggests Bitcoin is replacing gold as the haven currency for the new generation of investors in China and East Asia in general. The cryptocurrency is much more liquid than gold, and it is as the added benefit of facilitating anonymity. In a place like China, where government censorship is prevalent, and professional hacking and scams are commonplace; anonymity is important.
In the Philippines, the surge of Bitcoin use as a method to send remittance payments has attracted the attention of the nation's government. Remittance payments in the Philippines total $30 billion annually, and a growing fraction of these payments are being conducted with cryptocurrency.
Gold vs. Bitcoin
In my last article Terrorism: Not Bullish for Gold, I made an observation of the relative lack of impact geopolitical uncertainty is having on gold prices. The conclusion is that gold no longer acts as a haven asset.
On the other hand, Bitcoins long-term price behavior seems to be very tied to political uncertainty. The cryptocurrency is feeling headwinds from the economic uncertainty in East Asia, but also the intensifying conflict over the South China Sea.
Investors in East Asia are turning to Bitcoin instead of gold as a way to move wealth out of depreciating currencies and hedge against political uncertainty. Bitcoin is replacing gold as the primary haven asset, and this will create further downside pressure on gold prices around the globe.
Overall, I believe we are witnessing a demographic shift. The younger generations of retail investors are increasingly losing interest in gold. Instead of physical metal, they are turning to higher-tech cryptocurrencies as a way to protect their wealth from government shenanigans.
Disclosure: I am/we are short GDXJ, DUST.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have no holdings in Bitcoin.