Is The Current Central Banking System Obsolete?
When I look back at the central banks’ monetary policies over the past few years since the Great Recession in 2008, I can’t help but think that central banks have squeezed the wealth factor out of the world economy, especially in the form of gold and silver, and has essentially moved that wealth into Bitcoin or cryptocurrencies temporarily. When you look at the data in regards to market cap for Bitcoin, some of the numbers thrown out there are numbers that are larger than some Fortune 500 companies, exceeding $500 billion in market cap. Such a figure suggests an astonishing growth over a short period of time. This exceeds the total value of silver production over the last 20 years and qualifies gold and silver in particular, as the most undervalued monetary asset class in the world.
Is this a bubble as most people seem to believe? Or is it the beginning of a transformation into a new global virtual economy, replacing the “real” economy, which central banks have manipulated via ultra-low interest rates and depressing the value of gold and silver with no true price discovery mechanism, to benefit the few? The stock market’s tremendous growth has not benefited the blue-collar or mainstream workers in the United States. Low interest rates have only helped the very few who could borrow at almost zero interest rates and invest in the booming stock market, with almost no risk. Companies have borrowed government money, subsidized at zero interest, and bought back their own stock, boosting the value of their own company.
Why Bitcoin was Created
Bitcoin was created as a virtual currency completely independent of the current banking system. It is a one-to-one peer form of payment with no restrictions, no regulations and no government or central bank involvement. It is the wild, wild crypto-West of currencies in the financial markets. Why was there such a desire to create a currency outside the traditional banking system? Because central banks have caused great damage over the years, benefiting the few, harming the many. Central banks borrowed money at discounted rates, which the Fed and the government hoped would be loaned to the regular Joe to develop a business, buy his first home or fund a better life, but that didn’t happen.
How strong was this desire to move outside the traditional banking system? $500 billion is a tremendous amount of purchasing power that is coming out of the economy and into Bitcoin.
Will The Economy Support Higher Interest Rates?
The Fed and central banks are concerned that inflation is not rising as fast as they would like to justify higher interest rates. Based on some economic indicators, it does not seem that the world economy is changing fundamentally over the long term, even if it has shown some patches of growth here and there. Record debt puts pressure on developing countries, with the possibility that interest rates will begin to rise, which will significantly increase the cost to maintain the debt. Without any economic growth and with no inflation, I believe that there is really no justification for raising interest rates.
The grave danger looking at this tremendous debt, which can’t be paid, is that we may be on the brink of bond-market massacre, where the bond holders vigilantes and markets begin to demand higher interest rates for sovereign bonds that are at risk. Japan is a perfect example, as is the United States, which is following the same path of mammoth debt with ultra-low interest rates to afford the interest payments on the debt. By some measures, the United States is the largest debtor in the world. If interest rate rose, the U.S. would be hard pressed to meet its interest obligations increasing the risk of another recession.
U.S. Dollar Under Pressure
At the same time, there is tremendous pressure on the U.S. dollar caused by the desire to move the U.S. dollar from its position as the world’s reserve currency to a secondary position. U.S. economic and foreign policy doesn’t seem to be aligned with this goal, given the sanctions and economic policies the U.S. has enacted against Russia and even against China, in some cases, essentially pushing the Asian powers to unify into an economic block around China. China’s economy seems to be growing rapidly, far faster than the U.S. economy. In contrast, the U.S. economy is looking more and more like a Third World country instead of a world economic leader.
China’s Move to Eliminate Cash
Returning to Bitcoin’s future, China has almost eliminated cash in their economy,with almost everything paid by cell phone electronically. The Chinese may be a sign of a dramatic change in the global payment system. In any case, Bitcoin is an indication that there is a tremendous amount of wealth that is looking for a way out of the central banking fiat currency system. Millions of investors are letting their feelings about the traditional banking system show by investing in Bitcoin, and their feelings amount to more than $500 billion—a loud and clear signal that the monetary policies of the Fed and the central bank fiat currency system have completely failed to find broad support among investors. And this is just the beginning!
Bitcoin and Gold: Sell Bitcoin and Buy Gold
If in the long-term Bitcoin eliminates the current banking structure or, even if it fails to become the new global means of exchange and just causes turmoil that shakes the current financial system to its foundation, the Bitcoin market will still experience major volatility during the transition period. The volatility might be increased by changes in regulations to make the cryptocurrency a global exchange mechanism. This volatility and disruption will scare some Bitcoin investors and, if the current financial system is failing, bring them back not to the stocks, bonds, and cash that they fled to buy Bitcoin in the first place, but to the most-traditional form of currency that has existed--and been valued--for thousands of years: gold and silver.
This could revert the long suppressed and manipulated price of gold and silver, in a violent and unexpected manner to its long term mean, which could catapult gold and silver prices to unimaginable levels.
China’s Gold exchange
The Shanghai Exchange appears to be a real market in bullion, with immediate physical delivery on every contract. Many have considered the phony “paper gold” markets, including the U.S. Comex futures market and also, potentially, gold ETFs, to be a significant impediment to using gold as a standard of currency value. China’s gold exchange might be a means to lessen or overcome this impediment. On April 19, the Shanghai Gold Fix officially began. The pricing mechanism is intended to be a replacement for the London Gold Fix, the primary price-discovery mechanism for gold bullion today. The London “bullion” market is not a market in bullion. Rather, it is a market in “unallocated” gold, defined as an unsecured liability of banks.
India’s First Gold exchange
India is set to introduce a physical gold exchange that would bring about an improvement in gold pricing and possibly lead to significant cash transactions. This physical exchange is to be launched by the India Bullion and Jewellers Association, a Mumbai-based bullion association. The concept of launching the physical exchange was to bring about an improvement in the gold market and introduce a sense of transparency to the gold market. India, being the second largest consumer of the precious yellow metal, will benefit greatly from such an initiative.
Is Gold Ready for Takeoff?
The gold and the silver markets have bottomed after the test of the market leading into the first half of December. If you take a look at the charts going back to 2015-16, this is a very similar pattern that has occurred before and confirms a bottom took place. This corresponds to an annual 360-day cycle that corresponds to the weekly and the monthly cycles. During the first two days of this week, the gold and silver markets confirmed that this bottom has taken place.
By trading above $1264, the gold market has validated once again the intermediate- to long-term upturn. By testing the $1253 level below, it has confirmed that the 9-year cycle is still intact, coming back and trading above $1264.
For the silver market, the ideal objective is $16.18, which would be confirmation that this bottom has taken place. The cycle for this week was to see a rally into the period for December 15-18, which is a 30- to 60-day cycle from the previous two highs that took place on October 16 and November 17. The rally that took place this week validates this analysis, and although there is a possibility of a two- or three-day correction, if in fact this does materialize, it would be an ideal time for any long to get on board for what could be the next rally unfolding with major strength.
The gold market decline to $1238, which is a little more than a $2 move above the highs for the year, allows us to maintain its intra-year up-trend, which is a 50% Fibonacci retracement on the intra-year gains.
One of the important things we need to see as we move forward is whether the gold and silver markets maintain these levels and trade higher. If they maintain these levels, it would increase the probability that we have seen the lows for 2017 in the gold and silver markets. Intermediate and short-term traders should be looking for any corrections from these levels to add to their long positions. I recommend that you enter at the market and scale down into the lows that we established this week. If the gold market breaks through $1269 and closes above there, it would be a strong additional confirmation that we have seen the lows for the gold and silver markets for 2017.
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts. This report is for educational purposes only.
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.