Could gold and bitcoin be headed for parity?

Here’s a lightly edited version of an article I published on the http://www.sharpspixley.com website.  To read the original article click here.

At current prices with gold closing last week back over $1,200 and the bitcoin BTC token at around $6,600, the idea of gold and bitcoin regaining parity they last saw a year and a half ago might seem a little far fetched. But Bloomberg Intelligence’s Mike McGlone seems to think otherwise. In a report earlier this week, he painted a scenario of the BTC price falling and gold rising which could bring the two back into parity.

McGlone’s hypothesis is that market volatility, particularly in the bitcoin price, is an important indicator which investors need to watch. After all, bitcoin has already fallen from its peak of almost $20,000 achieved only seven months ago, to its current levels – a fall of nearly 70% – and he sees another similar fall, coupled with a possible pick-up in the gold price as being a distinct, but perhaps arguable, possibility.

As readers will be aware, this commentator is no believer in bitcoin. We feel there is no substance behind it. It is only worth what people are prepared to pay for it. It has no real inherent value having been purely a computer creation. I read somewhere that one observer (Richard Bernstein) likened it to a Candy Crush token which struck me as being extremely apposite. As people fall out of love with bitcoin – and it will have lost a lot of adherents with its fall from last December’s peak – the potential for it to fall back towards zero is, to my mind, a strong one. Bitcoin itself (BTC) is currently struggling to stay above the $6,000 mark despite a concerted campaign by pro-bitcoin commentators to drive it back up – many will probably have a vested interest in high crypto-currency prices. If it does come back down to the $5,000s or below this could signify a stronger fall ahead.

We tend to watch some of the other less costly cryptos as a guide and the fall of these from their respective peaks has been immense. Ethereum, probably the second highest market cap cryptocurrency, for example is nowadays comfortably below the $300 mark. It peaked in January at just under $1,400, so it has seen a fall of over 80% in around seven months. Monero, reputedly the crypto of choice for ransomware scammers and the criminal element wishing to keep transactions out of sight of the law and the tax collectors, is also down over 80% from its December 2017 peak and most of the other minor cryptocurrencies are also down by similar percentages or more.

Gold, on the other hand, despite it having been having a particularly torrid time of late is only down by 12% from its peak this year in U.S. dollars and beginning to pick up again as the dollar turns weaker. Unlike the cryptocurrencies, gold has stood the test of time as a store of value and does at least have substance behind it.  The recent price fall has been all about dollar strength after a period of sustained decline, and perhaps we are due a reversal again as the real ramifications of the confrontational U.S. trade tariff impositions begin to sink in in terms of raised prices, and thus inflation, in the U.S. domestic economy.

We see gold’s long term fundamentals as strong. Even if we are not quite yet at peak gold we are there or thereabouts and global new mined production will start to decline – and once the decline starts it will accelerate as there has been a huge drop in gold exploration and new mega-project construction necessary to replace depleting older assets. Meanwhile global incomes in the emerging gold buying nations are rising and the longer term increase in demand likely to be thus generated, coupled with eventually declining output, will put the gold price under some strong positive pressure.

Gold at the moment is being squeezed by the strong dollar brought on by President Trump’s tariff war and the prospect of rising U.S. Fed interest rates. But Trump is beginning to recognise that the strong dollar is putting U.S. exporters at risk while mitigating the pricing effects of the tariffs and is unhappy with this. How long before he initiates steps, perhaps behind the scenes, to start to bring the dollar down with a corresponding uplift in the gold price?

Back to Bloomberg’s McGlone: he comments that “Bitcoin is down to about 5x the price of gold after stretching toward 15x. There’s little to prevent another four-turn reduction to get it back toward 1-to-1, in our view”.

He also feels that the gold market is about to start picking up again. He pointed out that gold’s 90-day volatility is at its lowest level since 1999, at the same time its 60-day volatility is at its lowest level since 1997 and that the last time volatility was this low, the price entered a three-week rally which saw it pick up 34%. A similar increase now would put the price back to close to $1,600 and that it only needs a minor spark to ignite such a change in perception. There are plenty of geopolitical uncertainties out there which could initiate such a spark. Gold investors will hope McGlone is at least halfway correct in his analysis. Bitcoin investors will be less enamoured!

Advertisements

Forthright views on direction of equity markets, gold, silver, bitcoin and the Powell Fed from Michael Pento

An explosive interview with Michael Pento of Pento Portfolio Strategies by Mike Gleason of Money Metals Exchange.

Michael Pento describes for us what may be coming in the bond and fixed income markets and the impact on the stock market (negative) and on gold and silver prices (very positive) in 2018. He also shares some of his very strong feelings about Bitcoin and the crypto-currencies which he describes as a ‘scam’.

Mike Gleason: It is my privilege now to welcome in Michael Pento, President and founder of Pento Portfolio Strategies and author of the book, The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market. Michael is a well-known and successful money manager and has been a regular guest on CNBC, Bloomberg, Fox Business News, and also the Money Metals Podcast, and shares is astute insights on markets and geopolitics from the perspective of an Austrian School economist’s viewpoint.

Michael, welcome back. Thanks for joining us again and how are you?

Michael Pento: I’m doing fine. Thanks for having me back on Mike.

Mike Gleason: Well, Michael, you focus a lot on the bond markets. Let’s talk for a minute here as we begin about the bubble that has been created and maintained there, and then we will get into the potential ramifications for precious metals. I was researching this morning and the yield on the 10-year Treasury note was 2.242% on December 20, 2015, just after the Federal Reserve made the first rate hike in the current cycle of raising the Fed funds rate. Today, the 10-year yield is 2.327%, a tiny increase from two years ago, so the yield has barely budged despite the funds rate ratcheting up a full percentage point higher. Now, the funds rate isn’t directly tied to Treasury yields, but shouldn’t this tightening be translating to higher yields? Why is that not happening?

Michael Pento: What a great question to start off the show. So, I’ll just dovetail on what you just said and say that in the beginning of 2017, the yield on the 10-year note was 2.4%, or just around that level. Now, as you said, it’s 2.32%. So, there’s a very good reason for why this is happening because the long end of the bond market is concerned with inflation and if the Fed is hiking rates from pretty much zero to one and a quarter percent as we sit today, the effective Fed funds rate is just a little bit above 1%, that doesn’t mean that the yield should go higher on the long end of the yield curve. Actually, what that does mean, is that the Fed is vigilant, for now at least, on fighting inflation.

They’re reigning inflation out of the economy. That means the long end is going to come down to meet the short end, and I will tell you on that front that in the beginning of 2014, 260 basis points was the spread on the two and 10-year note. And we’ve had five rate hikes since then and guess what the spread is today as we record this interview, 51 basis points. So, you don’t have to have an advanced degree in calculus to figure out that you have two rate hikes left, two, assuming that the two-year note rises commensurately with the Fed funds rate, two rate hikes left before the yield curve is completely flat.

And the problem is that when I’m reading a lot of material in the past few days that the all-knowing pundits on Wall Street from the big brokerage houses, the big wire houses, are claiming that we’re going to have five rate hikes. Mike, five rate hikes between today, December 6th and the end of 2018, five. Not two, five. That means the Fed funds rate is going to be well above where the 10-year note yield is trading today, so you’re going to have a massively inverted yield curve by the end of 2018. Not only that, you pile onto the fact that central banks are going from a $120 billion worth of counterfeit confetti each month to zero by October. So, if you’re not worried about a recession, if you’re not worried about an inverted yield curve, if you’re not worried about the central banks moving their massive bid from stocks and bonds and if you’re not worried about the stock market imploding in the next few quarters, if not months, you should be.

Mike Gleason: Interest rates are essentially the price of risk and the market seems to be saying there just isn’t much. However, you and I both know there is plenty, as you just discussed there, but this is bubble has persisted for years now. The truth is we don’t have real properly functioning markets and this extraordinary mispricing of risk will go on until, and probably suddenly, it doesn’t. What signals are you watching for in the bond markets, if you would expand on that, that would indicate the game is about up and are you seeing any of those signs?

Michael Pento: Well, you have to watch high yield spreads and the nominal yield. If you see those yields starting to spike, then you should worry. They were spiking a few weeks ago. They’ve since come down a little bit, but keep an eye on that. There were good break-even spreads, inflation break-even spreads. I watch those very insidiously. Of course, like we just talked about, you watch for the yield curve to invert.

When the yield curve flattens out and inverts, it means this – and it doesn’t really matter why it happens – some people will say, well, I hear this Mike, that you shouldn’t worry about the yield curve inverting this time because it’s inverting because. Because, the 10-year (German) bund is yielding .29%. Mario Draghi over in Europe is bending the whole yield curve to the south in Europe and that’s putting pressure on our yields here in the United States.

Well, that’s true to some extent, but let me ask you a question, if the yield on the 10-year bund was .5% not too long ago, why is it .29% now in light of the fact that everybody knows the ECB is going to taper from 60 billion euros of QE today to 30 billion come January, and eventually stop their QE probably in October around the same time the Fed steps up their monthly sales to 50 billion.

The answer is because the economy is slowing. It’s very clear to me, the economy and inflation is slowing. That it’s putting further pressure down on long-term yields. That means the yield curve is going to invert and it’s not different this time. What that means is that if you’re a depositor at the bank and you’re going to be getting say X% on your money, whatever it is, one, two percent on your money, and then the private banks make the same loans are yielding the same as they’re paying in deposits, it no longer benefits the bank to lend out money. So, money supply growth crashes and that means deflation starts to diffuse across the economy and that means asset bubbles crash.

And I just want to make one thing very clear. What happened this week, this week happened, this data point was breached. The total market capital stocks is now a staggering 140% of GDP. Yes. It did reach 140% of GDP. That ratio has only been higher at one time in history and that was during just a few short months around the very peak of the NASDAQ bubble. Outside of that very short duration, that ratio for decades was 50%. So, we don’t just have a regular stock market bubble, we have an epic Stock Market bubble that is couched within the biggest bubble in fixed income that the world has ever seen and it’s not going to end very well.

Mike Gleason: Now, let’s talk about what a bursting of the debt bubble might mean for precious metals. One could argue that if real interest rates move sharply higher, it will weigh on metals, which don’t offer a yield at all. It’s zero or even negative real interest rates that gold bulls want to see. But that certainly hasn’t been the case in recent years. Maybe gold and silver will respond as safe-haven assets in the turmoil in markets created by a collapse in bonds will drive demand for metals. What would you expect the long overdue reckoning in bonds will mean for gold and silver prices, Michael?

Michael Pento: The last time we had an inverted yield curve in a recession was circa 2006-2009. And gold benefit is very greatly leading up to the Great Recession, but if you look on your data points and see what happened in 2008, gold did not do very well at all. And that was partially because real interest rates rising is not good for gold, but it was also the case that there was a huge dollar short occurring at that time.

So, people were borrowing in dollars and investing in the so-called BRIC countries, Brazil, Russia, India, China. When it became evident that we were having a global recession, the manifestation of the global recession, people had to unwind those carry trades. So, in other words, they sold renminbi and they sold the ruble and they went back into dollars driving the value of the dollar way up. That crushed gold in the short term. But then you remember, from 2009 all the way to really late 2011, early 2012, gold had a huge run and that’s because deficits absolutely soared. We had annual deficits in this country were well over a trillion dollars. We’re going back there again and then the dollar started to again weaken.

This time around there is no massive dollar short. As a matter of fact, it’s quite the opposite. In this next iteration of a recession, there may actually be dollar weakness. Even though you have rising real interest rates, which has always been the death knell for gold, you’re not going to have that rise in the dollar. That will mollify or attenuate the swollen gold prices, if there is any at all, but on the other end of this recession, and once this recession becomes manifested and you see the Fed going from wherever they are at that juncture, maybe 2% back to zero and then QE… and then we have Mr. Marvin Goodfriend on the Board of Governors – he’s been nominated by Donald Trump – he wants negative, nominal interest rates. He wants to ban cash. You’re going to have universal basic income. You’re going to have negative nominal rates. You’re going to have QE. You’re going to have perhaps even helicopter money. You’re going to have some version of that dangerous inflation cocktail and that has to be incredibly bullish for gold.

Mike Gleason: It sounds like a “perfect storm” sort of scenario there for the yellow metal. These days, when you talk about markets, the topic of bitcoin and crypto currencies is almost certain to come up. Bitcoin hit $13,000 earlier today [$16,000 today – Monday – Editor] as we’re talking here on Wednesday afternoon. It’s epic run higher this year cannot be ignored. Have you taken any interest in this space? We’d like to get your thoughts on where this phenomenon is headed.

Michael Pento: Well, you were you asking me about crypto-currencies. I’ve been on record for well over a year saying that it’s a scam. I’ve been wrong for well over a year. I will never own a crypto-currency in my life. I will never own a bitcoin or Etherium or any of these things. When you think about it Mike, what is a crypto-currency. Well, what you really own … You always see these pictures of people holding a coin with a B on it with a dollar sign through it. That’s not a bitcoin. A bitcoin, and I’m far from a computer programmer, so please understand, but from my knowledge of what a bitcoin is, it’s a private key. So, what you actually own is a private key, which is just a series of letters and numbers. I think it’s about 64 of these. It’s a series of letters and numbers, characters, that exist not even in tangible form, they exist in the Internet, so they exist digitally. So, how could a bunch of numbers be considered money?

The definition of money, it has to be portable, tangible and it has to be transferrable, but the most important factors of money, they have to be extremely rare and virtually indestructible. Now, what the heck is extremely rare or indestructible about numbers and letters? They’re very, very common and they have zero utility. Bitcoins and crypto currencies have zero utility. Let me repeat that. Zero utility outside of that ecosystem. So, you have to agree, in order to believe in Bitcoin, that this chain of numbers and letters can be worth $13,000 per unit and that that chain of numbers and letters is money, but outside of that ecosystem, there’s zero utility and you have ask yourself what good is it to be able to move numbers and letters via the Internet. Well, you could move U.S. dollars electronically over the Internet.

What you really should be asking is how can I move gold. Gold, which is all the properties of money, gold has. And most importantly, it’s virtually indestructible and extremely rare. There are over a thousand crypto-currencies, so various versions of those numbers and letters in the private key. There’s an immutable open ledger that is used to transfer bitcoins, but you can use a private blockchain to move gold. There are companies that do that. That’s the value of the blockchain. The blockchain’s value is not to move letters and numbers over the Internet and then somehow think that unit could be anywhere near $13,000. It’s a scam. It’s going to come crashing down and I’ll not be a part of it.

Mike Gleason: Well, I don’t think anyone’s going to wonder where you stand on that, thanks for honest assessment on that. Now, what are your thoughts on Jerome Powell taking over for Janet Yellen as the new Fed Chair. He’s a mainstream dovish-minded economist from all indications, so will it be more of the same, or do you have any insights on what a new Powell Fed will look like?

Michael Pento: Well, everybody says he’s going to be more of the same. He’s another dove like Janet Yellen, but you have to understand – and there’s two things I want to mention about Mr. Jerome Powell. Everybody knows he’s nominated by Donald Trump, but why did Donald Trump make the switch from Janet Yellen to Powell? Well, Mr. Powell is going to assent to two things. Number one, what does Donald Trump love to talk about more than almost anything else? Well, he likes to talk about how great the stock market’s doing, so I can assure you one thing is Jerome Powell will not allow the stock market to go down very much, very quickly. That’s number one.

Number two, Donald Trump is on record now, not Candidate Trump, President Trump is on record saying, he wants a weaker currency and he’s also a lover of debt. So, I expect in the long run, maybe not the short run because you’ve seen this baton has been passed to Mr. Powell, who’s going to carry on with Janet Yellen’s interest rate hikes and the reduction of the balance sheet. But, once the recession hits and the stock market turns south, and I’m talking about the 10% hit that I see happening very, very soon is going to quickly morph into 30%. And once we get 30% plus down in the stock market, you’re going to see Mr. Powell reverse course very quickly, because Mr. Trump can no longer brag about the stock market when it’s down 30%. And you’ll see all those things that I mentioned, some variation of that cocktail and that is negative interest rates, QE, universal basic income and helicopter money.

Mike Gleason: Well Michael, as we approach the end of the year here and start looking forward to 2018, I would like to ask you what you think people might be talking about this time, say a year from now, in the markets? What are a couple of those key events that you see happening in the next 12 months and also, your outlook for gold next year?

Michael Pento: Well, I think you’ll be talking about the epic crash of crypto-currencies a year from now. I think a year from now, you’ll be talking about the inversion of the yield curve. I think you’ll be talking about a crash in inflation and the onslaught of deflation. You’ll be talking about a crash in the major markets and in the capital markets. You’ll be talking about a reversal in the Fed’s monetary policy. You’ll be talking about a falling dollar and you’ll be talking about gold, which will be well over $2,000 an ounce by the end of next year, given the fact that construct I just laid out. If half those things that I just mentioned occur, gold will be well on its way to its all-time record nominal high.

Mike Gleason: It should be a very interesting year. I know we have talked a lot with you and you, of course, write a lot about the oscillations between the inflation cycle and the deflation cycle. And it’s always great to get your commentaries here and read them on a regular basis. We always appreciate your time, Michael. Thanks so much for the times you’ve come on this year and I certainly look forward to doing it again. Now, before we let you, please tell people how they can follow you more regularly, get those great commentaries in their email inbox each week, and also other information that they might need to know if they would like to potentially become a client of your firm there Pento Portfolios Strategies.

Michael Pento: Thank you Mike. The office number here is 732-772-9500. You can email me directly at mpento@pentoport.com. And the website is PentoPort.com.

Mike Gleason: Well, thanks again Michael. Enjoy the Christmas season and I look forward to our next conversation in the New Year. Take care and thanks for all you do.

Michael Pento: God bless you. Merry Christmas Mike.

Mike Gleason: Well that will wrap it up for this week. Thanks again to Michael Pento of Pento Portfolio Strategies. For more info just visit PentoPort.com. You can sign up for his email list, listen to the mid-week podcasts and get his fantastic market commentaries on a regular basis. Again, just go to PentoPort.com.

And don’t forget to check back here next Friday for our next Market Wrap Podcast, until then this has been Mike Gleason with Money Metals Exchange. Thanks for listening, and have a great weekend everybody.

Gold/Silver vs. Bitcoin Comparisons: A No-Brainer… or Brainless?

by: David Smith*

For most of the year, as Bitcoin soared, crashed, and soared again, cryptocurrency vs. physical gold-silver talking heads engaged each other in heated rhetoric about which of these venues is here to stay.

Some of the biggest names in finance, government, and the newsletter analyst space have made comments that – to be charitable – appear less-than-fully informed. Comments like “Even though bitcoin could rise to $100,000, it’s still going to zero!” don’t offer much insight. Some other questionable assumptions:

2017 percent price change comparisons: Relating this year’s gold and silver’s price range to that of bitcoin misses an important point. Yes, bitcoin (BTC) has risen by a much greater percent, but it’s also fallen more. I don’t recall gold dropping 40% this year, which bitcoin has… on a couple of occasions.

Bitcoins

Please note: Bitcoin has no tangible, physical form.

 

Trash-talking gold and silver as “antiquated”: Bitcoin is now considered legal tender in Japan, but at this time, its primary function is for use in the purchase and sale of the 900+ “alt coins” currently available.

Most of these exchange entries in the crypto-space are not really “currencies” at all and will never trade as such.

Rather they are “coins” or “tokens” digitally created and circulated to raise seed money, via initial coin offerings (ICOs) in order to solve some business application in a blockchain-connected manner. Many have no trading volume – possibly because the market is skeptical of their business plan – and have become more or less “dead” coins.

At present, a relative few have an actively trading market. Investors have dropped literally millions of dollars into scores, if not hundreds of entrants which have appeared on the scene like dragon’s teeth, in many cases only to see volume dry up soon thereafter.

At present, digital apparitions can be created and marketed by just about anyone. The following example demonstrates how easy it is (for now), and how gullible some people really are.

Can I interest you in a “Useless Ethereum Token”?

Earlier this year, the “Useless Ethereum Token” (UET) was “announced” online. The “Issuer” wrote:

You are literally giving your money to someone on the Internet and getting completely useless tokens in return. There are no ‘whitepapers,’ no ‘products’, and no ‘experts’. It’s just you, me, your hard-earned Ether, and my shopping list.

You would think this blatantly-stated scam would elicit exactly zero response, yet reportedly, the UET ‘Project” was able to raise more than $60,000!

By the same token, it’s a safe bet that many Venezuelans wish they had traded some of their bolivares fuertes (“strong Bolivar”) notes, rendered worthless over the last few years, for a few ounces of silver – or a single ounce of gold – which could now purchase respectively, six months of food, or a house.

Becoming a victim of “default bias”: We all have a tendency to operate through a lens which uses the past as a default setting.

We keep doing what we know, avoid taking new risks, and resist changing the way we think.

Default bias can cause lost opportunities – whether it involves learning about the blockchain or being hesitant to buy precious metals when they’re in boring “wear you out or scare you out” sideways action (another David Morgan homily)… as they’ve been lately.

Dismissing Bitcoin as “just digital”: Kim Iskyan (Stansberry Churchouse Research) addresses the criticisms leveled at bitcoin and the blockchain. Responding to the charge that it’s “purely digital,” he notes that fully 90% of all the money – or as David Morgan refers to it, “paper promises” – that exist around the world today are not physical either!

Doug Casey is always one to see beyond the next investment valley (or country), and he pegs what most people miss when they argue that bitcoin is “bad” for the future of precious metals. As he said,

When people buy these cryptocurrencies, even if they know nothing about hard money, economics, or monetary theory, they inevitably ask themselves, “Hmm, Bitcoin or the dollar?” They’re both currencies. Then they start asking questions about the nature of the dollar…the nature of inflation… and whether the dollar has any real value, what’s going to happen to it, and why.

People start asking themselves these questions – which wouldn’t have occurred to them otherwise… and it’s going to make them very suspicious of the dollar. It’s going to get a lot of people thinking about money and economics in a way they never thought about it before. And this will inevitably lead them to gold…

What I am doing: In addition to staying very active in metals and miners, I have placed “small money” into several coins and tokens having viable business models in hopes of making an asymmetric profit.

Gold Bull Market 1970s vs. 2000 to date

In spite of the current turmoil, I remain steadfast in the belief that the next few years will see gold and silver trading several times higher than their nominal 2011 prices of $1,900 and near $50 respectively. The blockchain is here to stay. As for bitcoin, only time will tell.

We may even see digital coins and tokens backed by precious metal. But these changes in the crypto space will not replace them. Indeed, gold and silver will almost certainly – to the surprise of many bitcoin bulls – markedly increase demand.

I plan to continue holding the majority of my investible funds in gold and silver. How about you?