SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD VS. BITCOIN – ONE WILL BE UP, THE OTHER DOWN !!
The general equity market was lackluster in August. The price of gold bullion firmed steadily through the month, endng up 4.2%. Our gold related portfolio, largely driven by the performance of the mining stocks, outperformed on the upside. As we have pointed out before, the gold mining stocks have the potential to multiply by many times, since they are so cheap, historically, versus the price of gold bullion, which is still down substantially from its high of $1900/oz. in 2011. The weakening of the US Dollar which began in June continued through August. A weak dollar is not a necessity for gold (and the mining stocks) to go up in price but, all other factors being equal, should prove to be a positive for us.
The rise of crypto-currencies, the most prominent of which is Bitcoin, has no doubt attracted your attention as journalists breathlessly describe the fortunes being made by “investors” in this new “asset class”. I believe there is a relevance of this development to our investment in assets related to gold, the only “real” money. Please bear with our, longer than normal, discussion which provides a background on Bitcoin, then finally its relevance to gold related investments.
BITCOIN, AND CRYPTO-CURRENCIES
Currency is most often defined as a form of money, circulated through the economy and used as a medium of exchange for goods and services. Most broadly used currencies have been issued by governments, which these days, unbacked by anything tangible except taxing power, are themselves a crypto-currency.The universal acceptance of gold, for literally thousands of years, provided credibility for the currencies that were backed by gold. Over thousands of years, the longest lasting currencies were those convertible into a proven store of value, most often gold and/or silver, therefore controlling the amount issued, and providing predictable purchasing power of those units of value. Several years ago I created a three minute youtube video, on this subject, that discusses why “Warren Buffet (who dislikes Gold) is Wrong” which you can watch at https://www.youtube.com/watch?v=ah7Y2rHuhCs .There has never been an unbacked “fiat” currency that has lasted. It is just a question of time until the politicians of the day dilute the currency into oblivion as they try to satisfy their constituents.
The best known cryptocurrencies currently are Bitcoin and Ethereum. You should know, though, that (per James Grant’s Interest Rate Observer) “there are now 840 cryptocurrencies, worth $123.4 billion. Two weeks ago, there were 828 cryptobrands, worth less than $90 billion”.
One of the requirements of a desirable currency is the knowledge an owner has as to what quantity of goods of services that “unit of exchange” will be worth. Look at it simplistically. Let’s say we have a closed “society”, call it a “residential community” with 100 homes for sale, and the total amount of currency that is circulating within that society is $100M. Depending upon how many residents want a new home, there will be transactions at an average price, perhaps at an average of $1M per home. Let’s say then, that the government, or some other issuing agency, puts $1 billion more value (in cryptocurrencies or oil or bananas or whatever) into that community and distributes it among the residents. It’s obvious that those homes are going to be worth a lot more “money”, therefore the previously existing currency (U.S.Dollars, in the US, these days) will have been severely depreciated. It is ridiculous to assume that new currencies, issued by governmental agencies or the “quant” creators of Bitcoin and the others will not inflate the assets of existing goods and services over time, in essence diluting the previously issued currency as far as its previous purchasing power. It is just a question of degree, and time before the newly issued currency circulates within the society.
The proliferation of individual competing cryptocurrencies, as well as the enormous volatility in price of such currencies, by their very nature, invalidate these cryptocurrencies as predictable stores of value or units of exchange. Nobody can know from one day to the next, let alone over months or years, what the purchasing power of Bitcoins or the others will be. Speculators might want to “roll the dice” in terms of what Bitcoin might sell for tomorrow, or next week, but I suggest that nobody in their right financial mind would put a “serious” amount of money into Bitcoin as more than a speculation for a short timeframe. Of course, a “serious” amount of money or time will vary among investors. Some vendors such as Spirit Airlines have accepted Bitcoin as payment, but you can bet that they have converted that Bitcoin into a more “stable” currency ASAP.
The proliferation in recent years of cryptocurrencies is a commentary on (1) an unfortunate human inclination to try to make “a quick buck” through speculation (2) a search for an alternative to governmentally issued cryptocurrencies which have had no backing since Richard Nixon closed “the gold window” in 1971 (3) a “reach” for a return by investors frustrated by federally suppressed interest rates on their savings accounts.
The essence of my conviction is that Bitcoin (and the others) will fade from existence over time, and speculators will lose their “investment” in these “tulips” of the 21st century, since there is no limit to the number of these types of currencies that can be issued. While the amount of governmental Central Bank digitally created currencies also have no limitation, at least the taxing capability allows the government to provide some sort of value to the currency after the ……… hits the fan.
BITCOIN VS. GOLD
This discussion very much also relates to my conviction regarding the long term ownership of gold related assets as a store of wealth and potential medium of exchange. It is likely that the cryptocurrencies have siphoned off a certain amount of capital that is looking for a safe haven away from government’s prying eyes. It is possible that the gold price will “go parabolic” just about the time that the Bitcoin frenzy winds down.
I remember a CNBC TV segment a few years ago, when Larry Kudlow, the well regarded financial commentator, had his nightly show, he invariably talked about his intense disapproval of the ownership of gold, which had started to slip from its all time high at $1900/oz. Gold, he said, had no “utility”, it was a psychological game and therefore very dangerous. See my youtube video, referred to above, @ https://www.youtube.com/watch?v=ah7Y2rHuhCs. So one night in 2012 or 2013, he was doing a segment on Bitcoin, which had just started to emerge, and he said: “Bitcoin is ridiculous, it has no backing, now if you backed it with Gold, you would really have something”. I sent him an email, saying “Larry, I’m confused, help me out”. He never responded.
I believe that when the books are written (possibly after my lifetime) and the fiscal/monetary follies of the early 21st century are described, Bitcoin and the other cryptocurrencies, including those currently being issued by worldwide Central Banks, will be described as “ringing the alarm bell” at the beginning of the financial revolution to follow. My advice to readers, which you have no doubt already concluded, is to avoid the cryptocurrency “asset class”, except perhaps as the rankest of speculation. It’s hard to know whether your capital will last longer in Bitcoin or in a Las Vegas casino, but the result will be the same. Those casinos weren’t built by customers walking away with much in the way of winnings.
CONCLUSION
Just in the last few days it is becoming apparent, that, as crypto-currencies trade at new highs, governments, including China, are cracking down on their usage. Many “investors” in Bitcoin and others are using this currency as a tax avoidance mechanism, which provides predictable unhappiness for governments around the world. On the other hand, gold is being continuously accumulated by Central Banks including China, Russia, and many others, to the tune of hundreds of tons annually. It is my opinion that, when Bitcoin and its imitators get disillusioned, a significant portion of that capital will flow to the ultimate “safe haven” investment, namely gold and its related investments.