Is Bitcoin The Canary In The Crypto Mine: If So, Buy Gold

|
Includes: BTC-USD, COIN, DGL, DGLD, DGP, DGZ, DUST, DZZ, GDX, GDXJ, GEUR, GHE, GHS, GLD, GLDI, GLDLF, GLDW, GLL, GTU, GYEN, IAU, JNUG, NUGT, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Scot Macdonald

Summary

The fundamentals point to a continuing bearish US dollar.

Brexit uncertainty, mixed economic data, and the weakening US dollar as a global reserve currency point to the rise of alternatives, such as Bitcoin and gold.

Based on the fundamentals and technical analysis, gold looks bullish.

US Dollar: Bearish

The US dollar appears to be showing a very bearish trend based on the fact that on Friday, December 29, 2017, the dollar index closed at 91.826, below the October and November lows. Based on my analysis, this puts into play the lower targets of 90.50 and 90.65.

From a fundamental point of view, the US dollar has been in a continuous downtrend for years. It has been declining since 1971 when President Richard Nixon took the dollar off the gold standard. Since then, the US dollar has lost more than 98% of its value. With such a decline, is the US dollar going to zero? Or as the US dollar approaches zero, will it be revalued with the introduction of a new dollar currency?

What will replace the dollar as global currency?

In reality, there are two real candidates to replace the dollar. One is the Chinese renminbi. The world's reserve currency is usually the money that circulates in the world's biggest economy. That was true of the pound in the 19th century, and the dollar in the 20th.

A sudden dollar collapse would create global economic turmoil. Investors would rush to other currencies, such as the euro, or other assets, such as gold and commodities. Demand for Treasuries would plummet, and interest rates would rise. U.S. import prices would skyrocket, triggering inflation.

Bitcoin and the Dollar: Transformational Change

It is not a coincidence that Bitcoin has become so popular, especially over the past few months. We have seen a monumental appreciation in the price of Bitcoin, which is historical in its size. The Bitcoin situation, as I have argued in previous articles, is essentially a product of the loud and clear message that investors' sentiment has turned against the central bank fiat paper currency system. It is my strong belief that the fiat paper currency system is in the process of a major transformational change. We have yet to see the implications of this profound change that is occurring in the monetary system and how the central bankers are going to deal with this cryptocurrency phenomenon.

Cryptocurrencies have been used for years on the dark internet. Such transactions have served as validation and confirmation that the blockchain currency technology behind Bitcoin can be applied to other sectors of the economy.

Mixed Economic News and Brexit Uncertainty

As we end the year, the picture for the US dollar is far from promising. As we take a look at the European economic picture, it is mixed. The French statistics agency reported that conditions in the Eurozone's second-largest economy had finally recovered to pre-crisis level in several sectors. Meanwhile, a breakdown of German growth figures attributed its rapid 0.8 per cent expansion in the third quarter to strong exports and accelerating investment.

Some data suggest that the European economy is showing some economic strength, but the picture is ambiguous when you take into account Brexit, which is affecting Britain’s economy.

The data points that are coming out of the UK indicate that it is weakening compared to the EU. The British central bank may be justified in increasing interest rates, although we aren’t seeing inflation rates that would truly justify such increases. The UK actually is still dealing with some recessionary implications of its decision to leave the EU. Overall, many investors are confused about the implications of Brexit. Most polls show that there is some questioning about whether Brexit was the right thing to do. At the minimum, it introduces uncertainty into the market. Was it wise to raise interest rates in Britain at a time of such uncertainty and risk? Or might it soon be a time to lower interest rates? The future is just one pass through the possibilities, and right now, the future is far from certain.

In the United States, data and investor sentiment indicate that the economy is showing some growth. The central bank appears to be in favor of raising interest rates in 2018, probably three or four more times.

Gold: A Rise Like 2016 Again?

Turning to the price of gold, based on the price action that we are seeing, it appears to be very similar to 2016, when the Fed decided to raise interest rates for the first time for many years by a quarter point. What happened to gold? The price of gold broke out into a major $300 rally over about six months. Some stocks also rose to show record profits, which exceeded 1,000% over the same period.

I believe that the price of gold is setting itself up to accomplish a breakout from this suppressed level of prices that we have seen. The price of gold has been manipulated by the central banks and kept low to justify the stronger US dollar. The goal has been to maintain global acceptance of the US dollar as the reserve currency.

As we see in some countries, such as Russia, China and Iran, there is a trend toward eliminating the US dollar as the world’s reserve currency. The momentum to replace the dollar or at least to diversify from US dollar holdings to other currencies, such as the euro, and into precious metals and commodities, is increasing. Some countries, such as Venezuela, are even creating their own virtual currencies backed by natural resources, such as oil in Venezuela’s case (“Enter the 'petro': Venezuela to launch oil-backed cryptocurrency to circumvent US financial sanctions).

Is this the new trend for currencies in 2018? Is the US dollar doomed?

Gold S&D Weekly Levels

Courtesy: www.ema2tradelivesignals.com

I use the VC PMI automated algorithm to identify supply and demand levels for gold for the coming week. For information on the VC PMI, please see Beware And Prepare, Gold And Silver Have Arrived!. Based on the first filter, the nine-day moving average of $1,280, gold is showing a bullish trend. The gold market closed Friday at $1,309, above the nine-day moving average, which indicates a bullish indication. The VC PMI also provides the other possibility; if the market were to close below $1,280, it would neutralize this bullish short-term trend.

From the mean price for the coming week of $1,299, we can extrapolate where the extreme above and below the means are for the coming week. Because the market closed above the weekly price momentum indicator of $1,299, the market is bullish. If the market price were to close below $1,299, it would neutralize this bullish uptrend. Therefore, we have two indicators that the gold market coming into next week is bullish.

The targets above the mean are based on the third filter, which identifies the extreme above the mean. These are the points where you should take profits if you are long; the sell 1 level is $1,320 and the sell 2 level is $1,331. If the market were to close below $1,299, then the VC PMI activates the buy 1 level of $1,288 and then the buy 2 level of $1,267. If the market goes below $1,299, cover your short positions and reverse to go long at the $1,288 to $1,267 levels.

Buy Gold Long-Term

It is my opinion, based on the fundamentals of the US dollar, interest rates, Brexit, and Bitcoin, that the ambiguity, uncertainty and volatility created by Bitcoin in the currency system is causing a tremendous amount of uncertainty. I’m very comfortable holding gold and silver on the long side. The gold correction to $1,238 or close to it, was below $1,264 or $1,253, which were the 18-year and 9-year cycle average prices. Gold then reverted back above the $1,253, $1,264, $1,271 and $1,275 resistance levels, closing above $1,300, which was extremely bullish pattern action. These moves validated all of the previous analysis I published in Seeking Alpha. I continue to support buying on any corrections into the $1,288 and $1,267 levels in gold, and if you are on the long side, take some partial profits at the $1,320 to $1,331 levels next week.

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. It 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.