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!