Tag Archives: ethereum

Gold Set Up For Big Move This Year – What About Cryptos?

Gold and silver had a sharp run-up in the last two weeks of 2017.  However, the abrupt move in gold has been accompanied by a rapid rise in the gold futures open interest on the Comex. Furthermore, based on the last COT report the banks have dramatically increased their net short position and the hedge funds have gotten, once again, extremely net long.  I don’t like the looks of the COT report right now plus I anticipate a possible brief “relief” rally in the dollar index.

But what about cryptocurrencies?  Over the past few weeks the largest and most actively traded cryptocurrencies have been massacred in price.  This follows on the heels of the news that the founders of Bitcoin and Litecoin sold 100% of their holdings.  Nothing like insider selling as a signal about the value of what was sold…

Phil Kennedy invited me on to his podcast to discuss precious metals, cryptocurrencies and the U.S. dollar. We engage in a friendly (I want to emphasize “friendly”) debate on the merits of cryptocurrencies:

The bottom line for me is that gold has been declared a Tier 1 bank asset by the Bank of International Settlements. This means that gold is considered the highest form of bank asset. I believe there’s a good chance gold will move toward and over $1400 this year. As for a price prediction for the cryptos – it depends on the degree to which the fear of losing money overwhelms the fear of missing out on gains for the momentum-chasing speculators – most of whom are Asian-based. We may be approaching that point of no return:

Is Bitcoin Demand Hurting The Price Of Gold?

The popular narrative that has gripped the financial media searching for reasons that the price of gold is sluggish for reasons other than overt western Central Bank manipulation, is that Bitcoin interest is diverting cash that would otherwise be going into gold.  However, I would argue that the type of trading funds playing in the cryptocurrency “sandbox” is little more than “action junkies” looking for anything to buy with high upside velocity.  These “investors” never buy gold other than perhaps chasing gold-related securities when the price of gold speeds higher in price (like from early 2016 through August 2016).  In fact, a recent report attributes a large amount of recent volume in Bitcoin trading to  Japanese retail traders / Japanese men dominate Bitcoin trading (Deutshe Bank)

Seeking Alpha has published my analysis explaining just some of the reasons that the idea that cryptocurrencies are diverting capital away from going into physical gold is little more than anti-gold propaganda.  Note: I am not trying to discourage anyone from buying Bitcoin or any other cryptocurrencies.  Over a long enough period of time, assuming the Government stays out of the market – and I firmly believe the Government will eventually interfere with the process – the market will decide the relative legitimacy of cryptocurrencies vs gold as a store of value and as money.

This analysis focuses on the retail investor demand for gold and Bitcoin. Institutional investors, for the most part, do not invest in gold or cryptocurrencies.

I want to dispel a false narrative about Bitcoin and the price of gold. The mainstream and alternative medias have been propagating the idea that the frenzied capital flowing into Bitcoin is affecting the price of gold negatively. The idea is that Bitcoin is an alleged safe haven asset (very unproven, untested) that is diverting capital away from the precious metals. For instance:

“As gold loses steam after rallying to 12-month highs, one market expert says he is seeing bitcoin (sic) take a chunk out of the yellow metal.”  Source: TheStreet.com

This notion has no validity…You can read the rest of this analysis here: Seeking Alpha/Bitcoin/Gold

Bitcoin’s Inconvenient Truths: The Silence Is Deafening

Gold is instantly and optically recognizable as money. You don’t have to explain it. Bitcoin and Special Drawing Rights (SDR), like a bad joke, have to be explained. Many “cryptologitsts” from the start gave up trying to explain Bitcoin and just sell it as virtual gold, which is de facto fake gold.  – Dan Popescu, investment consultant

Numerous inconvenient truths are conveniently ignored by Bitcoin/crypto-currency promoters.  Not the least of which is that the fact that the original concept for cryptographic currency was envisioned by the NSA.   I guess it’s convenient to assume the NSA developed this concept and then put it out there for the private sector to develop.  Sure, that makes sense.

A rapid rise in price does not validate an investment concept.  Dozens of dot.com stocks went from simple websites to multi-billion dollar market caps and back to zero in the late 1990’s. Until proven otherwise by the long test of time, Bitcoin could be another product of a fiat money printing bubble that is 100x the size of the money bubble that fueled the dot.com bubble. Gold and silver have withstood the test of 5,000 years. Bitcoin has less than 3,000 days of time-testing.

Be leery of the serial promoters who have dropped their previous advocacy of gold and silver like a hot potato to become religiously zealous salesmen of Bitcoin.  These were often among the most raucously vocal in their protest of the use of Comex gold and silver futures to manipulate the market price.  Yet, their silence on the introduction of Bitcoin futures hurts my ears.

The bulwark promotion of Bitcoin is that it is a de-centralized form of money that exists outside of Government control. But is it really?  I dare say the roll-out of CME Bitcoin futures, as “regulated” by the CFTC, certainly smells like the implementation of official intervention.  Those who previously protested gold/silver futures must not deny this fact. Perhaps more troublesome is the embedded forms of counter-party risk endemic to the system which creates Bitcoin.

Anything that exists in cyberspace is vulnerable to hacking.  This is a fact that has yet to be invalidated.  Circling back to the NSA white paper referenced above, can anyone out there truly claim the expertise required to deny that the NSA, or any other major sovereign intelligence agency, does not have the ability to corrupt the block-chain?  To be sure, cryptocurrencies are subject to network or infrastructure risk during a crisis.  Unequivocally, crypos are subject to government regulation.

Speaking of which, if I were a Bitcoin advocate, it would bother me that western governments go out of their way to hide their interest in gold as a monetary asset, yet they openly embrace cryptocurrencies.   Perhaps when the BIS declares Bitcoin or Ethereum to be a Basel 3 Tier 1 Central Bank asset like gold, I’ll have a change of heart.

The price of Bitcoin has experienced a remarkable run in price this year. Of course, the same could have been said for Dutch tulip bulbs from late 1636 to late 1637.  Most of the traders are chasing the price higher, with little to no understanding of the object they are chasing with their money, in hopes that someone at a later point in time will come along and pay a higher price to them.  Even worse, these price-chasers have placed undying faith in the analysis of Bitcoin coming from the  same con artists with whom they placed religious faith in the analysis of precious metals.

Also, up to this point there’s been  an absence of two-way price discovery for Bitcoin. Once the CME futures are rolled out, it will introduce – albeit in an unwelcome format – a provocative method to sell Bitcoin on margin.  The use of margin is the hallmark of a fiat currency-based fractional banking system – the very nature of which Bitcoin supposedly repudiates. The Bitcoin longs will face the same unlimited supply potential of paper Bitcoin that precious metals investors have endured for decades.

Make no mistake, I’m not trying to derail anyone’s interest in Bitcoin or cryptocurrencies.  And I’ll be the first to admit that it’s likely the price will go a lot higher from here.  But if the issues I raise here are indeed legitimate, how do you know when it will be the right time to sell?  That is to say, while the parabolic rise in Bitcoin has been largely continuous, any number of events could occur that would force the price re-discovery to be a step-function.  It’s all wine and roses on the way up, but at what price will there be a bid for you relieve yourself of your position?

Goldman Sachs Says Gold Is Better Than Bitcoin

“Precious metals remain a relevant asset class in modern portfolios, despite their lack of yield,” analysts including Jeffrey Currie and Michael Hinds wrote. “They are neither a historic accident or a relic.” Looking at properties such as durability and intrinsic value, they are still relevant even with new materials discovered and new assets emerging, such as cryptocurrencies, they said (LINK)

Here’s what blows my mind:  When gold ran from $250 to $1900, the entire western mainstream financial media called it a bubble. Bitcoin has run from $250 to $5500 and price momentum-chasers and the usual hypster con artists exclaim that it’s going to $100,000. Qu’est-ce que c’est, Rudolph Havenstein?

This is typically what a bubble looks like:

NVDA is without a doubt in a parabolic bubble. In a recent Short Seller’s Journal I explained in detail why NVDA’s fundamentals might justify a price closer $30 and provided ideas for shorting NVDA. Short-selling is the market’s method of introducing accountability and price discovery into the valuing assets. The problem with Bitcoin is that it can’t be borrowed and shorted. There’s no mechanism to impose express a bearish view of Bitcoin’s fundamental value.

The Goldman report goes on to say:   Intrinsic value:   There’s a limited supply of gold and other precious metals in the Earth’s crust, whereas in the case of cryptocurrencies, it’s easy to create alternatives, meaning there’s effectively no control over supply at a macroeconomic level and no intrinsic value due to rarity.  Unit of account: Gold is better at holding its purchasing power, and has much lower daily volatility. Bitcoin/dollar volatility has averaged almost seven times that of gold in 2017, the bank said.

All the pro/con-Bitcoin noise aside, without question the Bitcoin chart reflects “bubble-mania.”  Not everyone is “all-in” yet. As with all manias, it will probably become even more manic before someone whispers “fire” and the move toward the exits quickly goes from a brisk walk to a stampede.

But if everyone who has faith is all-in and no one is short, who will be left to buy when flood of sellers are looking for any bid to hit?

The Bitcoin And Cryptocurrency Bubble

I actively traded the internet stocks during the late stages of the internet/tech stock bubble in 1999 – from the short side. I will admit that I did take a few long-side day trade rides on a few internet stocks. I remember one Chinese internet stock that I bought in the morning at $10 after its IPO free’d up to trade and sold it about 2 hours later at $45.  To this day I have no idea what the company’s concept was all about  – I think it was one of those incubators. I doubt that company was in existence after 2001.  As such, the crypto-currency craze reminds me of the internet stock bubble.

The cryptos certainly are a heated debate. The volume from the Bitcoin defenders is deafening, the degree to which I’ve only seen near the peak of bubbles. I had a subscriber cancel his Mining Stock Journal subcription after sending me an email explaining that he canceled because he was pissed off that I was not a Bitcoin proponent.  He accused me of discouraging people from buying Bitcoins. His loss, he’s missed on out some high rate of return trade ideas in a short period of time like Banro and Tahoe Resources.  I’m not trying to discourage anyone from buying anything. I’m simply laying out the “caveat emptor” case.

Having said that, there’s truth to the proposition that the inability to short Bitcoin contributes to its soaring valuation.  I’d like to have an opportunity to see what would happen to the value of gold if the ability to short gold via the paper gold mechanism was removed from the equation.

Is it “Bitcoin” or “Bitcon?” The cost to produce, or “mine,” a Bitcoin does not imbue it with inherent value, as some have argued. It cost money to produce Pet Rocks in the 1970’s and they took off like a Roman Candle in popularity purchase price. Now if you own a Pet Rock, it’s nearly worthless. It costs money to produce and defend dollars. We know the dollar is headed for the dust-bin of history.

I’m not saying you can’t make money on cryptos. A lot of people made a small fortune on internet company stocks in 1999. But I’d bet that 98% of the internet stocks IPO’d during the tech bubble no longer exist. Currently cryptos are fueled by the “greater fool” model of making money. Most buyers of the cryptos are buying them on the assumption they’ll be able to sell them at a later time to another buyer at a higher price.

Cryptos are de facto fiat currencies. Perhaps there’s a limit to the supply of each one individually. But that proposition has not been vetted by the test of time. I do not believe that anything in cyberspace is 100% immune from hacking. Just because there have not been reports of the Bitcoin block-chain being hacked yet does not mean it can’t be hacked. It’s also possible that, for now, any breach has been covered up. Again, the test of time will resolve that. However, as we’ve seen already, the quantity of cryptocurrencies can multiply quickly in a short period of time. Thus, in that regard cryptos are no different than any fiat currency.

Finally, all it takes is the flip of a switch and your Bitcoin is unusable. But all these flaws are, for now, covered up by the euphoria of the mania. This is no different from every flawed “investment” mania in history. The current wave of crypto buyers are buying them with the hope of selling them at higher price later. “Hope” is not a valid investment strategy. “Hope” is the heart-beat of a speculative market bubble.

Perhaps one of the most definitive signals that the top in Bitcoin is imminent is this snapshot taken by the publisher of the Shenandoah blog at johngaltfla.com:

This picture was snapped in Florida. The sign says “got bitcoin? Passive income and no recruiting. Earn up to 1% on your money Monday – Friday.”

I recall reading about the process by which Bitcoins are “mined.” Anyone can get started but it involves an upfront investment plus the ongoing expense of the considerable amount of energy used to power the computer system required to engage in the mining process.

Let me guess, the creators of Bitcoin will be happy to assist you with buying the equipment and software necessary to get started?  How is this any different from a high-tech-equivalent of a multi-level marketing scheme?  As johngaltfla asserts: “When someone implies that it is ‘easy money’ it isn’t, it is a bubble.”

I’m not here to criticize anyone attempting to profit from trading Bitcoin. I am suggesting that it is not a good idea to get married to the trade. I regret not loading up on Bitcoins in 2012.

Without a doubt I believe there is legitimacy to the cryptocurrency concept. However,  I can envision a Central Banking-led attempt to implement the crptocurrency model as means of centralizing the process of removing cash currency from the system. But that also means the eventuality that Governments collude to remove competing cryptos from the internet. This is just surmisal on my part.  Again, the test of time will determine the ultimate fate of cryptos.

Speaking of time-tested money, it’s worth noting that China is going to roll out a gold-backed yuan oil futures contract – not a cryptocurrency-backed yuan contract. Perhaps one of the major Central Banks will eventually roll out a gold-backed cryptocurrency. That’s where I believe this could be headed.

Should You Use Leverage With Precious Metals And Mining Stocks?

While I will maintain, until proven wrong by the test of time, that Bitcoin and Cryptocurrencies are nothing more than a temporary fad, investing with a long term outlook (20-30 years) gives the investor the best probability of generating life-style changing wealth.

William Powers, of MiningStockEducation.com, invited onto his podcast to discuss using leverage in precious metals and mining stock investing.  We discuss greed/fear, using margin with mining stocks, volatility, options, futures and the leveraged ETFs.

The problem for most investors, and the reason many have not made a lot of money – or might have lost money – in the precious metals sector is the inability to invest with a long term perspective.  Since 2001, gold has outperformed every asset class.  The mining stocks, in general as measured using the HUI index, have outperformed the Dow/Naz since 2001.

If your reason to be invested in a sector is still valid, there’s no reason to sell investments in that sector.  Have the reasons for investing precious metals as a hedge against a collapsing U.S. economic and political system, and thereby a collapse in the U.S. dollar, changed? Have the problems taking the U.S. down been fixed?  The answer is pretty obvious, which means you should be holding your precious metals investments, even if you bought them in early 2011.   In fact, if you bought then, you should be buying more now.  I know I have been adding to my holdings gradually since early 2016.

The next issue of the Mining Stock Journal will be published this Thursday.  I’ll be reviewing a junior stock that  has gone parabolic and a mid-cap producer that has been hammered hard but is poised to bounce back just as sharply.  You can learn more about the MSJ here – new subscribers get all of the back-issues:  Mining Stock Journal information.

Portrait Of A Stock Bubble

Just like the Dutch Tulip Bulb bubble, internet stock bubble, and the  mid-2000’s financial asset bubble, the current stock market is no longer  a price-discovery mechanism.   It has deteriorated into a venue in which Central Bank-manufctured liquidity – in the form of printed currency and credit creation – has flooded into the system, enabling investors to chase the few stocks rising in price at the highest velocity (click to enlarge, graph on the left sourced from Jesse’s Cafe Americain).

The drivers of this modern day Dutch Tulip phenomenon are the so-called “Five Horsemen” stocks – AAPL, AMZN, FB, GOOG,MSFT. To that grouping I toss in TSLA.  Among all of those bubble stocks, TSLA has become, by far, the most disconnected from any remote intrinsic, fundamental value.  AAPL alone is responsible for 25% of the YTD gain in the Dow and 13% of the YTD gain in the S&P 500. AAPL’s revenues and operating income have declined over the last three years (2014 to 2016).  More often than not, even on days when the S&P/Dow are red, most if not all of the Five Horsemen + TSLA  seem to close green.

Eventually, the music will stop and this “no-price-discovery-possible” market will become a “can’t find a seat” market.  The abruptness and rate of decline will be breathtaking. Perhaps only matched by the outflow of capital from the cryptos by “investors” who leveraged up their cryptocurrency holdings to throw more “money” at TSLA.

The good news is that a lot of money can be made shorting stocks.  Since April, stocks like IBM, GS, SHLD, BZH and GE presented in the Short Seller’s Journal as shorts have outperformed the SPX/Dow.  SHLD is down 47% in 7 weeks – a home run.  BZH is down 18% in three weeks.  In the next issue, a “funky” financial stock will be featured that has the potential to drop at least 50% over the next 12 months if not sooner.

No one knows what event will trigger the stock bubble collapse.  One possibility is the ongoing financial implosion of the State of Illinois.  In stock bubble periods, all news is imbued with “the glass is half full.”  As an example, Illinois’ credit rating was reduced recently to BB+/Baa3.  That is a junk rating. But the media characterizes it as a “the lowest investment grade” rating – i.e. the “glass is half full.”

Both rating agencies never downgraded Enron to junk until it was weeks from Chapter 7 bankruptcy.  Illinois is on the brink of financial disaster.   See this article as an example:  Illinois Owes Billions.  This problem is absolutely dwarfed by Illinios’ public pension problem, which Illinois underfunded by a couple hundred billion (officially about $130 billion but that’s not on a true mark-to-market basis).

When the music finally stops, the perma-bubble bulls will be looking for that proverbial “seat” in all the wrong places.  But the next stampede of capital will be out of stocks, bonds, cryptos and “investment” homes and into physical gold, silver and mining stocks.