Bitcoin is all the rage, but in the long run, it might be more bark than bite. Although the technology of blockchain and cryptocurrencies will live on, the way the financial markets have pinpointed bitcoin as the end-all-be-all for the complex is arguably flawed logic.
The cryptocurrency idea is less than a decade old and will undoubtedly experience growing pains. Many believe bitcoin is the start of a new era capable of changing society in a manner similar to the internet. How soon we have forgotten the struggles of technology pioneers. Remember Pets.com?
Considering the mania, it is hard to believe bitcoin was created as an experimental currency and involves the practice of solving math equations to “mine” the asset. Since when does doing algebra instantly create a valuable asset? Further, bitcoin was never intended to be an investment vehicle and would likely prove to be less valuable than just about any tangible asset on the planet should the world undergo a calamity.
In short, bitcoin’s astronomical value is the result of perception not reality. This isn’t a new concept in the financial markets, but we’ve never seen emotions get this out of hand.
Some argue these characteristics are no different than those of gold, and that is a reasonably true statement. I’ve always had reservations regarding the practicality of gold being an efficient medium of exchange, but the truth is it has been used by mankind for millennia. More importantly, the gold market is extremely deep.
Investors in gold bullion, casual collectors, technology manufacturers, and those valuing its beauty, are all holding a piece of the pie. The bitcoin market, on the other hand, is believed to be largely owned by roughly 1,000 market participants with uninformed retail traders scrambling to bid up the price of scraps.
Recent weakness in gold is being attributed to the premise that bitcoin is an alternative to precious metals investing. However, that comparison is probably a stretch. We aren’t seeing anything in gold that we haven’t seen multiple times this year. This is the fourth time we’ve seen gold prices fall below $1,250; previous occasions were attached to narratives other than bitcoin.
Similarly, the gold market tends to see significant weakness in the month of December met with buying by mid-month; the seasonal support generally continues through early-March. Thus, in spite of the bitcoin vs. gold chatter, gold bulls shouldn’t be deterred from looking to employ long positions on large December dips. Over time, such a strategy has worked more than it hasn’t.
Gold speculators perpetually hold bullish positions, but their aggression fluctuates throughout time. The profit potential in being long gold is considered greater than being short because rallies can be far more volatile than selloffs in this particular market. Also, gold bugs are stubborn and have never lacked conviction in the face of diversity.
In any case, we’ve noticed when the net long position of large gold speculators as depicted by the CFTC’s (Commodity Futures Trading Commission) COT (Commitments of Traders) report falls beneath 100,000 contracts the gold market has a tendency to find a bottom. At the moment, large speculators in gold are holding roughly 100,000 contracts. This suggests that a bottom could be near but there is also some room for further liquidation in the near-term.
As a refresher, the COT report is issued by the CFTC weekly to provide data about which types of traders (large speculators, small speculators, and commercial hedgers) are long or short, and how aggressive each group has gotten with their position.
The negative correlation between gold and the U.S .dollar is well-known. Generally speaking, a higher dollar puts downward pressure on gold prices and vice versa.
This year, the correlation has been weaker than it has in the past but it still exists. Gold futures have settled in the opposite direction of the dollar roughly 45% of the time. Consequently, if the bearish technical pattern on a weekly dollar index chart holds true, gold should be supported.
Specifically, the dollar index has formed a wedge pattern with swift resistance at 94.00. If this area triggers a reversal as the chart suggests, we could see a retest of 90.00. The last time the dollar index was valued near 90, gold was trading near $1,350!
Since its infamous collapse in 2013, gold prices haven’t been able to make a lot of progress in either direction. Nevertheless, we’ve seen some emotional peaks and troughs as traders attempt to push prices beyond the multi-year trading range. The story promoting the trend has always been most accepted at the reversal points.
In essence, when the fundamental chatter for the bullish case is loudest the market has been met with selling and when the talking heads begin to grow overwhelmingly bearish, buyers have habitually stepped in. In this instance, we think the argument that bitcoin is bearish for gold because it is attracting speculative dollars that would otherwise be allocated to gold, will soon be debunked just as the other stories told at peaks and valleys of this trading range have been.
It is remarkable how well the Slow Stochastics indicator has worked in the gold market. Of the last 10 occasions dating back to 2012, nine buy signals triggered by the oscillator has resulted in a subsequent upswing. That said, the single failure taking place in early 2013 was an utter disaster for anybody aggressively long the gold market so caution must always be warranted.
The Slow Stochastics indicator is currently displaying a buy signal (the oscillator is in oversold territory with a reading of 20 or below and the oscillator is beginning to point upward). If the trend of successful Slow Stochastic signals continues as expected, we should see gold find some sort of a bottom, albeit potentially temporary, in the coming week or two.
The weekly chart of gold futures points out two areas of support in conjunction with uptrend lines — the first being near $1,235 and another at $1,200. We expect these levels to hold. If we are correct about that, gold should retest resistance at $1,350 and if fundamental news supports it, a move toward $1,420 is in the cards. While we are not anticipating a run to $1,485, a significant unforeseen news event could trigger such a rally.
We’ve seen multiple gold slumps in recent years but they have all eventually been met with buying. Although this particular pullback could retest recent lows, or even the $1,200 area, the ultimate resolution of the current chart pattern should see higher gold prices going into next spring.
Beware, if we are wrong about support in the $1,200 area holding, the bears could be targeting $1,100 or even as low as $985! However, the odds are not in favor of such a decline at this time.
Despite the excitement over bitcoin and the widespread expectations that it is a sufficient replacement for gold, there are some serious consequences of holding bitcoin relative to gold that the market is not currently accounting for. These security risks might be enough to counterbalance the yearning for massive gains that might never be realized due to challenges in logistics and regulatory safeguards.
For instance, one of the appealing aspects of bitcoin is the fact that it bypasses banks and other financial intermediaries. This introduces a counterparty risk that most other financial transactions and assets aren’t exposed to. There have been a handful of bitcoin brokers leaving the business due to solvency or fraud issues, and those holding bitcoin at those particular brokerages are out of luck. Also, the internet is riddled with stories of bitcoin holders who have lost access to their bitcoin assets due to hacked computers, compromised email accounts, or simply losing an associated pin number.
Gold, on the other hand, is generally sitting in a bank safe with protections most citizens wouldn’t be capable of employing on their own. If the bank is robbed, there is likely some recourse to recoup the value whereas a bitcoin holder digitally “robbed” of the asset will never be made whole.
Accordingly, the new security risks associated with “investing” in cryptocurrency are far greater than most are willing to admit. As flawed as gold is, it has a long history of survival and relevance. That is more than we can say for bitcoin. – Carley Garner
The end of the bitcoin party might just come at gold’s hand – this according to well known gold supporter Peter Schiff, CEO of Euro Pacific Capital.
While many experts suggest that gold and bitcoin move in tandem, Schiff said it is absolute nonsense. “If you are in bitcoin the last thing you want to see is a big move up in the price of gold,” he said in an interview Tuesday.
According to Schiff, once the yellow metal really starts going up it can be “the pin that pricks the bitcoin bubble.”
“When people who have been buying digital gold decide they want the real thing and [t]hey want to make the switch, that’s impossible. [T]here is no way a significant amount of money can get out without imploding the entire [bitcoin] market,” he said. Schiff added that he would not be surprised if bitcoin dropped 80-90% in a single day.
On the gold front, the metal’s 60-day historical volatility is near its lowest since 2001, and money managers have cut their bets on a gold rally at the fastest pace in five months.
So are people just bored of gold?
“[S]ome money that might othwerise buy real good is buying this fools’ gold instead, it is taking away some of this demand for gold,” Schiff said.
But there’s another part to the equation, he added.
“The stock market is going up – a lot of people who were buying gold as a hedge think there is no reason to hedge – we have never seen so much optimism about the market, it has never been so expensive and so few people worrying that it is going down.”
Bitcoin prices briefly plunged $2,000 within one hour to below $16,000 on Wednesday, before paring losses, after the U.S. stock regulator suspended share trading of cryptocurrency company Crypto Co. (CRCW) on concerns about potential stock manipulation.
Gold and silver prices were ending the U.S. day session moderately higher and scored two-week highs Wednesday. Technically related buying has been featured this week, amid a lack of major, markets-moving fundamental news. February Comex gold was last up $6.40 an ounce at $1,270.60. March Comex silver was last up $0.142 at $16.295 an ounce. – Daniela Cambone
Gold is for wealth preservation and silver is for everyday currency and everyday transactions. We will see money, which is gold, returned to the monetary system in our lifetime. We will see silver being used as currency in our lifetime. I believe cryptocurrencies will make this possible and I believe cryptocurrencies are awakening people in ways the cabal/oligarchs/globalist, whatever you wish to call them, in ways they didn’t think possible.
2018 will be a year for gold and silver unlike we have seen in some time. Both will move higher in a sustained fashion throughout all of 2018. This momentum will carry both metals forward into 2019 where we will see even higher achievements being reached by both metals. Why so confident – simple. Nature is a bitch and she is pissed. Natural economic laws have not been forgiven; natural economic laws have not been overturned. We will see the rise of commodities like copper, zinc and steel in 2018 that is going to be unprecedented and this will help drive the precious metals.
The other determining factor is sound money. The cryptocurrencies have captured the imagination of millions of people around the world. These people were never interested in currency or money before. They have been asking questions for most of the second half of 2017 and they are now better educated about currency and money than ever before. This knowledge base will bring a significant percentage of people to the precious metals – real money, real wealth. Not all of them have become educated, not all of them that have become educated will move into precious metals but enough people that we will see a sea change in the precious metals market and by the end of 2018, when some of the more draconian efforts by governments around the world are unleashed, people will begin to understand the true nature of decentralized, off grid and money and currency.
There’s also the technical side of the “market”. Daniela Cambone, KitCo News, reported earlier today.
“The last three days have reconfirmed by commitment for a much higher gold price in 2018. We are making higher lows for the year – the recent behavior made me nervous, but something very telling happened in the last three days,” Lanci said in an interview on Thursday.
“On Tuesday we had a short covering rally. And Wednesday there was a 10,000 contract increase in December – that’s very unusual, that is an over 2.3% increase in open interest,” Lanci explained. The point Lanci stresses is that gold is now back in a “safe area” between $1250-$1275 an ounce. “The $1,700 call I believe in is going to come to fruition- [if gold gets] above $1275 I will double down on a momentum bet.”
Gold prices rose on Friday and were set for their first weekly gain in four weeks as uncertainty over the passage of U.S. tax reform pushed the dollar to a nine-day low against the yen. Spot gold was up 0.4 percent at $1,257.76 an ounce and set for a weekly gain of 0.8 percent. U.S. gold futures were 0.3 percent higher at $1,260.50 an ounce.
If we combine the education, regarding currencies and money, people have received in 2017 with the technical aspects that “traders” seek to make decisions and then we throw on top of that what Jeffrey Christian has recently said we have a trifecta showing the metals, not just moving higher, but moving enough to get people’s attention. – Rory Hall
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