Gold And Bitcoin Revisited

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Includes: BTC-USD, COIN, GLD, GTU, IAU, OUNZ, PHYS, QGLDX, SGOL, UDN, USDU, UUP
by: Andrew Hecht
Summary

Paper currency dilution since 2008.

Gold keeps coming back.

Bitcoin is a bubble with a story.

It is not all nefarious price action.

A message from means of exchange that are not fiat currencies.

I enjoy writing about gold and Bitcoin in the same article because it serves a deep seeded perverse need within my being. Addressing two of the most emotional and passionate groups of investors and traders in one piece invited some of the most interesting and thought-provoking debates.

Bitcoin and gold investors should have a lot in common as the two financial instruments both can fly under the radar of governments and regulators and are both alternative means of exchange. However, the instruments themselves have many of the characteristics of their audiences. While Bitcoin is less than eight years old, gold dates back to pre-Biblical days. Bitcoin aficionados tend to be young millennials while gold bugs tend to be old a crotchety, like me.

On September 8, 2015, I wrote my first piece on Bitcoin for Seeking Alpha. In that article, I said, " Today, I would rather own bitcoin than most other assets, including gold. Bitcoin was trading at $226.51 on September 3, 2015." On that day, gold was trading around the $1100 per ounce level. Gold is currently around $170 per ounce higher, but Bitcoin traded to highs if $35 below $3000 last week. In that article, the two camps argued the value of gold versus Bitcoin in the comments. Comments like, " Bitcoin is the most significant technological advance in the history of money since the invention of banknotes," came from the millennials while, " Gold is a store house of value, and it has been so for over 3,000 years. As for Bitcoin I'm not buying the hype," came from a gold-bug. A comment from someone who doubted the future of both gold and Bitcoin was, "… gold is another hustle. I always like to say, if gold is so valuable, then why don't they just KEEP IT and stop trying to sell it to you clowns, tongue in cheek of course. I have no particular problem with bitcoin, but is it 'worth' $200, $500, $1000. I think if you paid $1000 you will never see that again in your lifetime. I say its par value is $1 or less." As you can see, passions ran high back in September 2015 on this topic, and I am confident they are running even higher today less than two years later with gold in a bull market and Bitcoin a runaway freight train on the upside.

Paper currency dilution since 2008

Two years before Bitcoin was trading at 6 cents in 2008, the global financial crisis gripped took hold of markets. In the United States, the housing and mortgage-backed securities turmoil caused the failure of Lehman Brothers, and Bear Stearns disappeared into JP Morgan Chase. Many homeowners who refinanced their mortgages to take cash out of a real estate market that seemed never to go down in value found themselves with negative equity and lost their homes to foreclosure. Banks failed, and the government bailed out financial institutions to avoid a depression. In Europe, a sovereign debt crisis caused translated into a deep recession. Central banks around the world slashed interest rates and the U.S. introduced quantitative easing or repurchasing debt to stimulate the fledgling economy.

The tools employed by the world's central banks and monetary authorities flooded the system with cash. While cash is always king, too much cash caused the value of government notes to decline in value as the full faith and credit of the countries that print the money becomes dubious. The price of gold exploded higher and in 2011 reached its all-time nominal high at just over $1920 per ounce. In 2010, the advent of Bitcoin was a response to government regulations and those currencies that were not freely convertible on world markets like the Russian ruble and Chinese yuan. Bitcoin, the digital currency also serves as a means of exchange that embraced the spirit of globalism as it had no borders and the value was a result of bids and offers for the asset, making it a real free-market means of exchange.

Gold keeps coming back

The price of gold has seen ups and downs since 2008. Source: CQG

As the monthly chart of COMEX gold futures highlights, in 2008 before the global financial crisis, gold hit an all-time nominal high of $1033.90 per ounce surpassing previous high of $875 in 1980. In the wake of the economic meltdown, gold fell to lows of $681 late in 2008, but it turned around the exploded higher to over $1920 per ounce in 2011. The yellow metal has not traded below the $1000 level since.

In late 2015, as all commodities experienced selling pressure, the precious metal declined to a low of $1046.20, and since then it has been making higher lows and higher highs. The most recent high came in June 2016 at $1377.50 but after a correction to lows of $1123.90 in December 2016 gold has once again been flirting with the $1300 per ounce level over recent weeks. Gold keeps coming back, and as the momentum indicator on the monthly chart shows, the path of least resistance turned higher in April of this year in neutral territory.

Bitcoin is a bubble with a story

Bitcoin has been nothing short of explosive in 2017. The cryptocurrency rose from 6 cents in 2010 to just $1000 at the end of 2016, an amazing accomplishment by any measure. However, in 2017 Bitcoin has not only climbed above the $1000 mark, it recently traded to the lofty level of over $3000. Source: http://www.coindesk.com/price/

As the long-term chart dating back to 2010 illustrates, Bitcoin was trading at over $3000 on Monday, June 12 before it turned around and fell back to the $2600 level. A $100 investment in the cryptocurrency in 2010 was worth over $5 million at recent highs.

Bitcoin certainly feels very bublicious these days, but there is a reason for the ascent of the alternative currency, commodity, or asset whatever you like to call the wild raging bull. Blockchain technology promises to turn operations in banking, trading, and perhaps many other businesses upside down. The distributed ledger technology or DLT is a fast and expedient method of tracking ownership and increasing the efficiency of settlement procedures. Blockchain is a technological revolution for operations and settlements, and it has validated Bitcoin, to some extent. The cryptocurrency and blockchain have had a mutually beneficial relationship with each promoting the acceptance of the other. In the financial markets, there has been a rush to embrace blockchain innovations. The Commodities Futures Trading Commission under the guidance of the current acting Chairman Christopher Giancarlo has set up innovation lab for financial technology or Fintech, and blockchain is one of the core components of the initiative by the CFTC. While the priced action in Bitcoin has many of the hallmarks of a bubble market, the DLT or blockchain angle makes it a story on a higher level.

It is not all nefarious price action

Whenever I write or discuss the topic of Bitcoin, I get many comments about the nefarious aspects of the asset that came into being to subvert regulators and fly below the radar of governments around the world. While it is true that Bitcoin if the perfect asset when it comes to drug and arms dealing, human trafficking, prostitution, and for ransom computer hacking, it is also an electronic payment system that has taken off in countries like Japan and throughout Europe. In China and Russia, Bitcoin is a tool to move wealth beyond borders with the click of a mouse or the swipe of a finger on a smartphone. Therefore, nefarious activities are not the only reason that the cryptocurrency has taken off like a rocket ship. The ascent of Bitcoin is a phenomenon that deserves lots of attention these days. The young buck that has only been in existence for less than a decade has more than a skip in its step as it finds new applications and acceptance on a daily basis. One of the critical reasons for the bubble in the value of this asset could be that everyone loves a bull market. Everyone wants to get in on something that can make them wealthy in a short timeframe or overnight, it is just human nature, and that is why lotto tickets sell like hotcakes in the United States and around the world. However, the price action in Bitcoin and gold is a message that is clear as day.

A message from means of exchange that are not fiat currencies

Gold and Bitcoin both have roles as means of exchange. The fact that one could pay for a consumer good in Japan and other countries around the world using Bitcoin serves as proof. Bitcoin is the newest means of exchange in the world while gold is one of the oldest. Gold has been around as a store of value, and a means for payment since the first human found the glittering and lustrous metal floating somewhere on our planet in a stream. Gold's intrinsic value is what people will pay for it at any time. The fact that central banks and governments around the world are the biggest holders has validated the precious metal as a store of value. People adorn themselves with gold jewelry and trinkets which is a sign that the metal is a symbol of wealth and security. Governments currently hold more than one-third of all of the gold ever extracted from the crust of the earth over the course of history.

The price of gold has been steadily rising over the past decade and Bitcoin has exploded on the scene. A scandal at the Mount Gox exchange in 2014 slowed the ascent of the cryptocurrency. In 2013, the exchange was handling over 70% of all Bitcoin transactions. In 2014, Mount Gox announced that over 850,000 Bitcoins were missing or stolen the exchange quickly folded and those with accounts were left holding an empty computer wallet. At today's price, the losses would total almost $2.5 billion. There are still risks when it comes to the asset that exists only in the digital world, but that has not stopped the rapid ascent of Bitcoin.

The strength of both Bitcoin and gold is an important signal for traditional foreign exchange markets about the declining value of paper fiat currencies. Ignoring the decline in value of dollars, euros, yen, and all other paper money against these two assets over recent months and years is a mistake for any investor or trader. In my first article on the role of gold and Bitcoin in markets, I suggested that the cryptocurrency would outperform the yellow metal. While I got that dead right, I did not put on a pairs trade, and if I did, I would have taken profits a long time ago. I have a feeling I will be revisiting the relationship between gold and Bitcoin again over coming months and years. The rise of Bitcoin and gold is a story that has not yet reached its crescendo by any means.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.