Tag Archives: Bitcoin

BITCOIN DOWN 75% FROM ITS HIGH – WHAT TO DO NOW?

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We don’t get them all right, but we’ve been consistently negative on the prospects for Bitcoin, ever since we started writing about it in August of 2017. Bitcoin was trading then almost exactly where it is at the moment, about $4,600. Among our articles was one written at $16,964 on 12/19.17, one day after the all time high of $18,674. We have provided, for your easy review, our writings that have included reference to Bitcoin, the most recent listed first. A summation of our opinion today, is exactly as we expressed it with our first mention back in August of 2017. “When the books are written about the financial follies of the early 21st century, the rise of bitcoin will be one of the ringing bells signaling the end”.  There was 100% risk in owning Bitcoin at $18,674 and there remains 100% risk at $4,500.

August 16, 2018

SEMI-MONTHLY FISCAL/MONETARY UPDATE – BITCOIN DOWN, GOLD ALSO – BUY ONE, AVOID OTHER BITCOIN – FLIRTING WITH A NEW LOW, A CORRECTION IN A LONG TERM BULL MARKET, OR AN END TO ITS RUN?

https://www.liptonfinancialservices.com/2018/08/semi-monthly-fiscal-monetary-update-bitcoin-down-gold-also-buy-one-avoid-the-other/

February 1, 2018

FISCAL-MONTHLY FISCAL/MONETARY UPDATE – GOLD FIRMS, US DOLLAR WILL REMAIN WEAK, BYE BYE BITCOIN (BLOCKCHAIN ADVOCATES WILL GO WITH THE GOLD) 

https://www.liptonfinancialservices.com/2018/02/semi-monthly-fiscal-monetary-update-gold-firms-us-dollar-will-remain-weak-bye-bye-bitcoin/

January 17, 2018

SEMI-MONTHLY FISCAL/MONETARY UPDATE – SOMETIMES A SIMPLE VIEW WORKS BEST, + BITCOIN UPDATE

https://www.liptonfinancialservices.com/2018/01/semi-monthly-fiscal-monetary-update-sometimes-simple-view-works-best-bitcoin-update/

December 19, 2017

BITCOIN REVISITED: THE FLAW IS REALLY SIMPLE !!

https://www.liptonfinancialservices.com/2017/12/semi-monthly-fiscal-monetary-update-bitcoin-revisited-flaw-really-simple/

September 5, 2017

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD VS. BITCOIN – ONE WILL BE UP, THE OTHER DOWN !!

https://www.liptonfinancialservices.com/2017/09/semi-monthly-fiscalmonetary-update-gold-vs-bitcoin-one-will/

August 15, 2017

BITCOIN MUST BE THE “NEXT BIG THING”, RIGHT?

https://www.liptonfinancialservices.com/2017/08/bitcoin-must-next-big-thing-right/

August 1, 2017

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD SLOWLY RISES – BITCOIN “ADJUSTMENTS” – BE CAREFUL OUT THERE!

https://www.liptonfinancialservices.com/2017/08/semi-monthly-fiscalmonetary-update-gold-slowly-rises-central-banks-buying-equities-sell/

 

 

 

 

 

 

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – BITCOIN DOWN, GOLD ALSO, BUY ONE, AVOID THE OTHER

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – BITCOIN DOWN, GOLD ALSO – BUY ONE, AVOID OTHER

BITCOIN – FLIRTING WITH A NEW LOW,  A CORRECTION IN A LONG TERM BULL MARKET, OR AN END TO ITS RUN?

We wrote several articles on this subject, last summer and again in December. Our first cautionary notes were written 8/15/17 and 9/5/17 provided here, with Bitcoin trading just south of $5000:

https://www.liptonfinancialservices.com/2017/08/bitcoin-must-next-big-thing-right/

Our last analysis was written 12/19/17, within a day of the high price above $19,000, provided here:

https://www.liptonfinancialservices.com/2017/12/semi-monthly-fiscal-monetary-update-bitcoin-revisited-flaw-really-simple/

In a nutshell, not today, not tomorrow, but over a few years from now, it’s over. Blockchain technology no doubt has its applications but cryptocurrencies will fade into oblivion, with most of the fundamental flaws previously described in the articles linked above. We are not always right, and sometimes we are right or wrong, but for the wrong reasons. In this case, we’ve got it right for the right reasons. For heaven’s sake, don’t get seduced now, just because Bitcoin is down from $19,000 to $6,000. It is still $6000 too high.

WHAT’S HAPPENING WITH GOLD?

Gold bullion has hit a new low for the year, with the gold mining stocks following along, leveraged as usual to the price of gold. As we have previously written, there are all kinds of reasons that gold should be spiking higher, rather than lower, and it is only a few months ago that gold was on the verge of an upside breakout. Best we can figure, in addition to a very strong dollar, the downside pressure on the gold price has been from Central Bank selling, a result of turmoil in Turkey in particular.  We believe this will run its course shortly, if it hasn’t already.

Turkey’s commitment to gold had already been demonstrated to be less consistent than every other important Central Bank. While most other Central Banks have been steadily buying (or maintaining holdings) in recent years, Turkey’s holdings declined from 504 tons in July 2015 to 377 tons in Jan 2017, then built up steadily to 582 tons in Mid 2018. The most recent report shows they only hold 236 tons in July, so they have apparently liquidated 342 tons in the last couple of months.  The good news is that they don’t have much left, perhaps nothing by now.

Recall that the Central Banks in total have been steady buyers over the last nine years, in the range of 300 tons annually, up 36% YTY in ’17 to 366 tons, and running up 42% in Q1’18, the highest first quarter since 2014. Turkey’s disposition in Q2 will obviously skew that quarter’s result.

Let’s go through today’s top ten sovereign gold owners, and their change in reported holdings over the last several years. We say reported because China, in particular, is likely understating their holdings in a major way. The highlights are that the US, with over 8,000 tons is nearly as much as the next three countries combined. For six consecutive years, Russia has been the largest purchaser, increasing its holdings by 224 tons in 2017 and  overtaking China  to hold the fifth spot. Not every central bank is a buyer. For the second year in a row, Venezuela was the largest seller, 25 tons in 2017 apparently sold to pay off debt. Total  sales declined by 55% in 2017, the lowest since 2014, obviously overcome by purchases since the total net increase was 366 tons. This nine year old trend is obviously demonstrating that central banks consider gold to be an increasingly important store of value and safe haven asset.

India is the tenth largest holder, with 560 tons, representing 5.5% of their foreign reserves. This has been virtually constant since 2015. It is well known that the Indian public believes in gold as a long term store of value, with gold jewelry often part of a bride’s dowry.

Netherlands, at #9, owns 612.5 tons, representing 68.2% of their foreign reserves, constant since 2015. Interesting that the Dutch Central Bank recently repatriated a large amount of its gold from the U.S.

Japan, at #8, owns 765.2 tons, only 2.5% of its foreign reserves, constant since 2015. Interesting that they have been one of the most aggressive money “printers”, with interest rates in January 2016 below zero, helping to fuel worldwide demand for gold.

Switzerland, at #7, owns 1040 tons, 5.3% of its foreign reserves, constant since 2015. Interesting that while Switzerland for many years was a hub of gold trading with European counterparties, much of today’s trading is done with the increasingly important Hong Kong and China bullion markets.

China, at #6, reports 1842.6 tons, representing a mere 2.4% of its $3T of foreign reserves. After not reporting since 2009, the People’s Bank of China reported 1708 tons in mid 2015, up over 60 % in 6 years. Monthly reports were then provided for about a year, with an increase to 1842 tons with no change reported since the end of 2016. Since China is the largest miner of gold in the world, about 400 tons per year, and no gold seems to leave China, most observers believe that various government agencies are absorbing a great deal. It is not hard to conclude that the 1842 tons may be understating the true holdings controlled by the government by thousands of tons. The government has also encouraged public ownership with gold backed bank savings accounts.

Russia, at #5, reports 1909.8 tons, representing 17.6% of foreign reserves. The Russian Central Bank has been the largest buyer of gold for the past six years, just last year overtaking China’s reported holdings. They bought 224 tons in 2017, at the same time selling a large portion of its US Treasuries.

France, at #4, reports 2,436 tons, representing 63.9% of foreign reserves, constant since 2015. There has been political pressure to not only put a formal freeze on selling, but also to repatriate the entire amount from foreign vaults.

Italy, at  #3, reports 2,451.8 tons, representing 67.9% of foreign reserves, constant since 2015. European Central Bank President, Mario Draghi, was the former Bank of Italy governor. He has described gold as “a reserve of safety”, adding, “it gives you a fairly good protection against fluctuations against the dollar.”

German, at #2, reports 3,371 tons, representing 70.6% of foreign reserves, virtually flat, down 9 tons since 2015. Last year, Germany completed a four year repatriation program to move 674 tons from France and the US back to its own vaults.

United States, at #1, reports 8133.5 tons, the highest percentage, at 75.2% of foreign reserves, holdings constant since 1971 when Richard Nixon closed the hold window. It is interesting, to us at least, that the value of our gold holdings, as a percentage of US monetary aggregates, is almost exactly where it was in 1971 before gold went up over 20x in value.

Taking the above into consideration, there is every indication that Central Banks other than Turkey, along with Chinese agencies in addition to the PBOC, and public buyers, in China, India and elsewhere will absorb Turkish sales (if they haven’t already). Especially in the case of China, India, Japan, and Switzerland, with low single digit percentages of their reserves invested in gold, obviously aware of the worldwide debasement of paper currencies, and the danger in most other asset classes, it makes sense to increase their gold allocation. We continue to believe that  gold will again emerge as a store of value and a safe haven. Gold bullion and gold mining stocks will catch up with the ongoing price inflation of virtually every other asset class. Money printing and deficit spending does not create long term prosperity.

Roger Lipton

 

 

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD FIRMS, US DOLLAR WILL REMAIN WEAK, BYE BYE BITCOIN

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FISCAL-MONTHLY FISCAL/MONETARY UPDATE – GOLD FIRMS, US DOLLAR WILL REMAIN WEAK, BYE BYE BITCOIN (BLOCKCHAIN ADVOCATES WILL GO WITH THE GOLD)

The broad equity market continued upward in January. Gold bullion was up a little over 3%, the gold miners were up less (GDX up 2.2%, GDXJ down 1.3%). Our gold miner related portfolio was up inline with that group. We believe that the gold miners will start to outperform gold on the upside as they report Q4’17 earnings, the first quarter in over a year that the price of gold was materially higher than a year earlier. That will continue to be the case as Q1’18 is reported, and all through this year if gold holds its current price above $1300. We describe below two particularly positive recent developments.

The US dollar has recently been dramatically lower, in particular against the Euro, which represents the second largest collective economy in the world. We have written in the past that gold does not necessarily move inversely to the dollar, as many observers believe, since it depends on the time period one uses. However, all other things being equal, a weak dollar helps rather than harms the price of gold. The question then becomes: what is really the US policy? Over the last year, both President Trump and Sec’y of the Treasury, Steve Mnuchin have made statements that they consider a weak dollar a “blessing” in terms of US exports, our economy and our trade balance. They backed off that stance recently as they were attacked by certain pundits. However, DJT has continuously said “it’s all about jobs” and he is certainly not afraid of debt and deficits, which would pressure the US Dollar to the downside. The latest indication in this regard comes just last week in Davos, when Commerce Sec’y, Wilbur Ross, reflected back to 1945, just after Bretton Woods had established the US Dollar as the world Reserve Currency, and the US (with a strong dollar) was willing to be supportive of other countries rebuilding themselves after WWII. Ross said, though, that “it is a different world today”. (Check it out on Youtube, minute 19-20 in the presentation). Obviously, he is pretty directly saying that the US can no longer afford to support the worldwide economy at our own expense, implicitly blessing a lower dollar.

The second potentially powerful positive development is that a number of prominent institutions are planning to introduce cryptocurrencies BACKED BY PHYSICAL GOLD. Just this week, the UK’s Royal Mint, responsible for producing all the physical money in the UK, has announced the launch of its own gold-backed cryptocurrency. Also announcing similar plans are the Perth Mint in Australia, and the Sprott organization of Canada.

We have written (skeptically) about Bitcoin over the last few months, which readers can access through our Search function on the home page. We don’t think it is a coincidence that, virtually to the day that Bitcoin topped at $20,000 and started to fall by 50%, gold has been edging upward. It seems more than reasonable to think that speculators and investors would rather own a cryptocurrency backed by gold than backed by NOTHING. Since the total market value currently invested in Bitcoin and others is still something on the order of $300-400 Billion, there could be substantial additional demand for physical gold, whose total worldwide annual production is $140-150 Billion.

We  obviously believe that our gold related investment strategy is more valid than ever.

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – SOMETIMES A SIMPLE VIEW WORKS BEST, + BITCOIN UPDATE

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – SOMETIMES A SIMPLE VIEW WORKS BEST, + BITCOIN UPDATE

Economics seems like such a complex subject, as represented by PHDs and pundits. Some of you may remember Martin Zweig, a very successful money manager who made his name by predicting the 1987 crash. More than that, his investment mantra, “Don’t Fight the Fed” has proven to be one of the simplest, but most durable, tools in capital management. While everyone seems to be celebrating two quarters of 3% GDP growth (not “great”, but better than 2%), and debating whether the economy will continue to strengthen or weaken once again, everyone seems to be forgetting that Central Banks around the world have enlarged their collective balance sheet by something like TEN TRILLION DOLLARS since the financial crisis of ’07–08. In an effort to stave off a deflationary collapse, the Fed, the European Central Bank, the Bank of Japan, the Swiss National Bank, and the Peoples Bank of China have created new currency (something like “cryptocurrency”), and bought all kinds of fixed income securities as well as equities. This has, as designed, inflated the bond and stock markets, keeping interest rates very low (still negative on trillions of fixed income securities) and elevated the stock markets to record highs. Janet Yellen and other economists are mystified as to why all this newly created capital has not stimulated inflation in wages and groceries, ignoring the fact that inflation has been huge in the capital markets, real estate, art and other asset classes with the notable exception of gold (so far). The “wealth effect” for the upper class at least, has allowed the for the purchase of a Van Gogh painting for a cool $450M and apartments in the Big Apple for $60-100M. Grocery and apparel prices have not inflated, but the creation of $10 trillion of fresh capital has had its intended inflationary consequences in the form of asset prices.

Now comes the test, as the Central Banks begin to “normalize”, reduce their balance sheets, and pull back the Keynesian accommodation that helped to avoid an even larger financial crisis back in ’08. Our SIMPLE point here: If Central Banks provided $10 trillion dollars of freshly printed currency, which no doubt was a major contributor to the steady (though anemic) economic growth of the last seven years and the straight line upward in the stock and bond markets, it seems reasonably predictable that the removal of that “accommodation” will reverse a lot of that economic progress and asset inflation.

Do not despair, however. In our view, the stock and bond markets will not collapse, and THE REASON IS SIMPLE. THE CENTRAL BANKS WILL CAPITULATE, and back off their intended “normalization”. Within a matter of months, the sale of securities by our Fed, and the reduction of purchases in Europe, Japan, China, and Switzerland, will create a year to year reversal of something like a trillion dollars, annualized, of buying power, and that will weaken the worldwide economy. At that point, the politicians will scream “do something”, and the Central Banks will back off their QT (Quantitative Tightening). The result will be the “can kicked down the road” once again. Unfortunately, though, each financial “heroin hit” has to be bigger than the last to maintain the economic “high” (anemic though it may be), so the accommodation will need to be even bigger. Of course the long term downside consequences will be even more dramatic but that is a story for another day. The bond market, with the ten year note still at a historically low 2.6%, (“disbelieving” the strengthening economy), and the gold market which has been firming over the last month or so (anticipating the next round of accommodation), may well be signaling exactly this scenario.

Regarding Bitcoin: Now down about 50% from its peak (about the time we last wrote about it, on 12/19 at the high), we stand by our analysis (from 8/1 and 9/5 at much lower prices, and again on 12/19) The search function on our Home Page will bring up those articles for you). The youtube link below humorously summarizes the situation.  Blockchain technology no doubt will have its applications, but Bitcoin and its 1300 brothers and sisters, amounting to hundreds of billions of dollars of newly “mined” currency, is not going to have material staying power. Watch this video, more truth than fiction.

 

 

 

 

 

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2017 YEAR END FISCAL/MONETARY UPDATE – BE CAREFUL OUT THERE!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE: BITCOIN REVISITED: THE FLAW IS REALLY SIMPLE!!

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BITCOIN REVISITED: THE FLAW IS REALLY SIMPLE !!

On September 5th of this year I wrote an article about Bitcoin, which you can access below: After you have read the previous article, you can return here for my new conclusion. Good luck, and HAPPY HOLIDAYS !!

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD VS. BITCOIN – ONE WILL BE UP, THE OTHER DOWN

The price of bitcoin is several times higher now, but I stand by this article. The FLAW in the whole cryptocurrency “bubble” is as follows. While the number of bitcoins that can be created is presumably limited, which would therefore provide the long term value as a currency ( just as with gold over the last four thousand years) the number of competing cryptocurrencies is not limited. Three months ago there were something like 800 competitors to bitcoin, combining to create a total worth of about $125 billion. Now there are more like 1100 “bitcoin like” alternatives, in total worth perhaps $400 billion. In the 1920s, during the Weimar inflation in Germany and Austria,  when a loaf of bread cost 1,000,000 German marks, a mark was therefore worth one millionth of a loaf of bread. If a Bitcoin is worth $20,000., for example, that means the dollar is worth one twenty thousandth of a Bitcoin. That doesn’t sound to me like the US Dollar is worth much, especially if a computer can issue thousands of similar currencies that dilute the Dollar even further.

When the books are written five or ten or twenty years from now about the financial follies of the early twenty first century, the Bitcoin (and competing cryptocurrency) mania will be viewed as one of the “ringing bells” before the bubble burst. One man’s opinion, FWIW.

Roger Lipton

 

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD VS. BITCOIN – ONE WILL BE UP, THE OTHER DOWN

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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.

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – IS BITCOIN “THE NEXT BIG THING” ?

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BITCOIN MUST BE THE “NEXT BIG THING”, RIGHT?

Financial headlines are trumpeting the “money” that is being made by owners of Bitcoin, the revolutionary cryptocurrency. As this is written, Bitcoin traded for over $4,000/unit which is many times the value of just a couple of years ago, and a quadruple in 2017 alone. Something is clearly going on here, so the question naturally becomes what to do about it. Should you buy it and, if you buy it, how long should you hold it?

CURRENCY, DEFINED

A 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. There are privately “branded” currencies such as airline miles and credit card points that can be used for a limited number of purposes,  but most broadly used currencies have been  issued by governments, who have a number of ways of potentially “backing” the value of that currency by offering to exchange the currency for a broadly accepted “package” of goods or services. Most notably, from 1863 to 1933, paper “gold notes” were exchangeable into a fixed weight of gold, so the quantity of notes (currencies) was limited by the amount of gold that the government owned. The amount of notes (currency) that was issued by a government could grow as the economy grew, and the amount of gold mined, and then owned by the government, could grow proportionately. The universal acceptance of gold, for literally thousands of years, provided credibility for the currencies that were backed by gold. The fixed weight of gold exchangeable into the U.S. Dollar, for example, allowed the notes (currency) to be used as a “store of wealth”.  Governments, as opposed to the creators of cryptocurrencies today,  can at least “back” their currency, in ways to be determined by the crisis of the day, by  taxing their citizens. 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 .  Of course, in the history of the planet, 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”.

IT’S SIMPLE

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, at the same time depreciation the previously issued currency. 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.

WHY BITCOIN NOW?

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 THE PROBLEM

The essence of my conviction that  Bitcoin (and the others) will fade from existence over team, and speculators will lose their “investment” in these “tulips” of the 21st century, is that 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 amount the time that the Bitcoin frenzy winds down.

LARRY KUDLOW HAD IT RIGHT

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.

AND SO IT WILL BE WRITTEN

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 issued by worldwide Central Banks, will be described as “ringing the alarm bell” at the beginning of the financial revolution to follow.

IN CONCLUSION

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.

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD SLOWLY RISES – BITCOIN “ADJUSTMENTS”

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD SLOWLY RISES –  BITCOIN “ADJUSTMENTS”

The price of gold bullion firmed a bit through the month of July, with gold bullion up about 2.3% for the month. The chartists could say that a base has been formed to support a major move upward. The gold mining stocks were up somewhat more, reflecting the operating leverage from the change in price of their end product. Our major position in the miners continues to be our  emphasis and, as we have pointed out before, has the potential to multiply our portfolio value by many times. The weakening of the US Dollar which began in June continued through July. 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.

We talked last month about the steady increase in the monetary base that has been created by Central Banks worldwide, and that this financial experiment will undoubtedly end badly. An increasingly dangerous corollary of Central Bank currency creation is the purpose to which those funds are put to work. What is not well known is that Central Banks have been buying hundreds of billions of dollars of equities. Since major Central Banks cumulatively hold over $11 trillion of foreign currency reserves, it is natural that they should want to diversify those reserves away from the currencies which are being continuously diluted. Along with steady buying of Gold (which we suggest is the “real money”), the Central Banks are adding equities to the mix/

The Bank of Japan has been buying Japanese ETFs at the rate of $53 billion per year, and now holds over 71% of those ETFs. The bank is now one of the top 5 owner of 81 companies within Japan’s Nikkei 225 index. As reported by Grant’s Interest Rate Observer, the Japanese Financial Services Agency (Japan’s SEC) is now “paying close attention” to this phenomenon.

The European Central Bank has been buying 60 billion euros worth of bonds monthly, and Mario Draghi recently announced a continuation (A hesitancy to back off?) In the meantime, Deutsche Bank CEO, John Cryan, has said: “There has been absolutely no price discovery now in corporate bonds….which is a very dangerous situation”.

The Swiss National Bank has been steadily buying equity securities, including US based companies. Equity securities, as of Q3’16, comprised 20% ($128 billion) of their of their $643 billion in foreign exchange reserves, up from 7% in 2009, including investments of $1.7 billion in Apple, 1.08 billion in Exxon, and $1.2 billion in Microsoft.

Here in the US, our Fed has talked about beginning to unwind our $4.2 trillion balance sheet by no longer reinvesting the funds from securities that are maturing. The result of this form of money “tightening” can only be a guess, especially with an already soft economy.

These are serious amounts of capital being put to work in an increasingly dangerous way. To some extent, Central Banks are biased toward continued equity (and bond) buying, because their absence from the marketplace would cause a price decline and trillions of dollars of “paper losses” on their respective balance sheets. I learned a long time ago (the hard way) that when you become “responsible” for supporting a particular market, the best possible strategy is “get out of the way” and take the current loss before it inevitably becomes much larger. The key question, at this point for Central Banks, now becomes “Sell to Whom?”.

Lastly,  a Wall Street Journal  Headline this morning reads: Bitcoin RIval Arises From Sector Spat. I will write more about Bitcoin, and the other “Cryptocurrencies” in the near future. As a preview: I believe that years from now, books will be written about the current fiscal/monetary world we are living within, and the cryptocurrrencies will be appropriately viewed as symptomatic of the tail end of the financial folly. Stay tuned on this subject and, in the meantime, be careful out there.

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