Gold, Bitcoin and Australian Property
29 May 2017
Gold and silver prices have enjoyed a strong end to May 2017, with the former now trading back above AUD $1700oz. This week will likely prove decisive in terms of where the market heads next, with all eyes on Friday nights US non-farm payroll data, which may play a major role in the Fed’s pending June decision re US interest rates.
Since our market update last week, which you can access here, we’ve had a lot of clients bring up the subject of Bitcoin (BTC), and whether it’s basically a digital version of gold and silver or not.
As such, we thought we’d expand on our thoughts, focusing on what we think is the key mistake proponents of BTC make when forecasting ever higher prices.
And that mistake, if we can draw a hopefully useful analogy, is that they are mistaking the pipeline for the oil.
After all, oil transport has come a long way in the last 100 plus years, essentially moving from
Horse, cart and wagons, flatboats, barges and the railroad; to
In the 1940’s, tanker trucks, originally 40 to 50 barrel capacity were the primary means of transporting oil, with these trucks reaching +200 barrels in terms of capacity. From there we moved to
Pipelines for transport over land, with oil tankers the primary means of moving oil across the oceans
You can read a couple of articles on history of oil transportation here and here
As you can see, the process of moving oil from point A (production) to point B (refineries) to point C (end consumers) is now unrecognizably more efficient compared to 100 plus years ago, with billions of dollars of capital expenditure invested in this process. But at the end of the day, its still oil that is being moved from point A to point B to point C.
Our current banking system is the same, with the point I made in last week’s update that; _“_the credit card is an infinitely more efficient form of money transfer than the bank cheque ever was, whilst Paypass is more efficient still. Be that as it may, the actual money itself that is transferred using these mediums remains the same.”
You can see where we are going here when it comes to BTC, and why we think its proponents are mistaking what is truly a breathtaking technological development (the blockchain), with a supposedly superior form of money itself (BTC).
As an example of this, consider the front page of the following presentation, which I’ve screen-shotted below.
It came from a 2013 conference, and was titled “Why you should invest in Bitcoin”, with a focus on Bitcoin being “The Future of Payments”.
Source: Bitcoin 2013 conference (video accessible here)
In fairness to the presenter (much of the content is very good), he was talking up BTC’s prospects when it was a lot cheaper than it is now, so kudos to him on that, and he did only suggest investors allocate a very modest portion of their portfolio to BTC.
But the question again needs to be asked – is it a pipeline, or is it oil. The way I see it, the argument that one should invest in BTC because it's the future of payments is analogous to saying you should invest in pipelines because they’ll replace oil itself.
Recently, the same presenter from that video created the following chart, highlighting the potential value of one bitcoin should certain scenarios play out.
Source: Tuur Demeester
Needless to say, we are skeptical.
Proponents of BTC and crypto-currencies in general also have to deal with the fact that the number of competing crypto-currencies in existence continues to explode, as per the chart below from the Macro-Tourist Blog.
Source: The Macro Tourist Blog
As you can see, there are now more than 800 competitors to BTC in the crypto-currency space. Collectively, their market capitalization is pushing USD $80bn, which some would argue is not that large, given Apple could buy the whole lot with their cash pile, as well as all the major gold miners on the planet. There are also circa 200 FIAT currencies competing with BTC and the 800 odd crypto-currencies.
Meanwhile, there is still just one physical gold!
Our thoughts can thus be summarized in the bullet points below.
BTC is definitely not gold 2.0 or digital gold, but more and more people are questioning what money is today, and will continue to do so
This is no surprise given the extreme monetary policy decisions taken by central banks in the aftermath of the GFC, including but not limited to QE and ZIRP, which continue to this day
Many people questioning what money is today are naturally turning to physical gold and silver, whilst some are turning to BTC, with some cross-over between the two
This is not surprising as gold’s unique monetary qualities are not widely understood, hence people get excited about BTC thinking its digital gold, or gold 2.0, as it’s often been cleverly marketed as
I am a big believer in blockchain technology for reasons I’ve already explained (you can read about them in the previous article linked to above), but as discussed, this makes blockchain a more efficient pipeline, it doesn’t make it oil
As such, I think BTC and other crypto-currencies monetary status will prove ephemeral over long term
In the meantime some speculators will make a killing in BTC and other crypto-currencies, but the vast majority will lose money, and potentially quite a lot at that
Investors who are primarily focused on wealth preservation through the most difficult market, monetary and macro-economic environment we will ever see should not steer away from physical gold and silver as their primary savings assets
Australian Markets
If we can recommend one read for the day to our Australian clients, it’s a report published on Livewire Markets by Altair Asset Managements Phillip Parker.
In the report, Parker discusses why they are liquidating their entire portfolios, and returning the cash to their investors, citing (amongst other things);
An Australian east coast property market bubble and correction
Overvalued Australian equity markets
If ever there was a reason for an Australian investor to want to own precious metals, this is it, as any issues with our property and share market will negatively impact their wealth, whilst they’d also lead to declining interest rates, and a falling Australian dollar, which would compound the pain.
Precious metals would offer the best protection against that kind of negative outcome should it eventuate, with this kind of warning another reminder of the importance of owning gold and silver as part of a balanced portfolio.
Until next time
Jordan Eliseo
Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.