Gold Rallies as Cryptos Crumble

It’s not yet three weeks old, but 2018 is already shaping up as an interesting year in financial markets. Stocks have flown out of the gate, and bond yields are rising, with Bill Gross claiming we’ve seen the end of the bull market in fixed income.

Bitcoin and cryptocurrencies have crashed hard, whilst precious metals have continued their solid move higher, which began in mid December 2017, with gold comfortably trading back above USD $1320oz, and silver closing in on USD $17oz.

For Australian investors, gains in metals have been muted by the continued strength in the AUD, which has rallied toward USD $0.80, a significant move given the local currency was sitting closer to USD $0.75 barely one month ago.

Expectations of a late 2018 rate hike by the RBA, continued strength in iron ore prices and a soft USD across the board have all contributed to the recent AUD strength, though whether or not it can strongly push into the USD $0.80-USD $0.90 range remains to be seen.

Whilst we’ve been encouraged by gold’s start to 2018, it has to be said that from a technical point of view, gold is looking like it may need a breather when looking at both RSI and MACD on a daily basis, as you can see in the chart below.

We also saw a potential  “double-top” resistance at the USD $1345 level earlier this week, which would increase the chance we see a correction to at least USD $1320oz at a minimum, with a slight chance we could move all the way back into the high USD $1270oz range.

We aren’t guaranteeing that kind of move will occur, especially if the USD continues to fall, and we are still adding to our own holdings incrementally, but it’s worth keeping it in mind should we see a corrective move play out in the last two weeks of January.

Bitcoin is going how low?

Bitcoin bulls will be quick to point out that the kind of pullback we’ve seen this week is par for the course, with the notoriously volatile cryptocurrency experiencing huge percentage point drops in price in the past.

The following chart from Mauldin Economics highlights this, showing that, since 2013, Bitcoin has had pullbacks of at least 20% once a quarter or so.

Source: Mauldin Economics

Be that as it may, its also safe to say that up until Q3/Q4 2017, Bitcoin had nowhere near as many investors, nor was it gaining anywhere nears as much attention from the financial industry, as it is today.

The market capitalization loss in this weeks drawdown is also an order of magnitude we’ve seen before, whilst a skim of Reddit forums highlights genuine angst amongst late to the party retail investors who are already down 40% plus on a ‘can’t lose’ investment many made barely a month ago.

A happy Xmas has turned into a very unhappy new year.

It could very easily get worse too, with a daily point and figure chart suggesting Bitcoin could drop as low as US $7,100, and then US $4,200 eventually, unless the price moves violently higher, and breaks back above US$16,800 per coin.

Whilst it’s impossible to rule out the chance that it rallies hard again, if we were forced to bet, we see greater downside risk, with the charts looking pretty ugly right now.

More and more investors are also likely becoming aware of the limitations of Bitcoin, which may temper some of the more bullish forecasts, with Capital Economics, who produced the chart below, releasing a fairly damming report into Bitcoin earlier this week.

In it, they stated that it is “rubbish” that cryptocurrencies will replace fiat currencies, and that Bitcoin “is a bubble”.

Source: Capital Economics

Whilst we agreed with some of what Capital Economics said about Bitcoin, and see prices falling much lower, we did find one incredible assertion within their paper, which is worth sharing.
Discussing the potential lasting legacy of the cryptocurrency phenomenon, which they see as being a central bank issued digital currency, Capital Economics stated that “if physical cash were phased out altogether, central banks would have the option to set negative interest rates”. The next line in their paper states; “Meanwhile, people would have a risk-free way to hold funds”.

These are two crazy assertions to link together. Yes, the abolition of cash will allow central banks to set negative interest rates, but it will make anyone trying to save wealth a guaranteed loser of real wealth, rather than giving them a “risk free” way of saving. It’s no wonder people are willing to gamble on things like crypto when this is the kind of analysis they might come across reading mainstream economic commentary.

The Capital Economics paper can be read in full here.

Your money is safer in gold!

Not surprisingly, this week's crash in cryptocurrencies has led to an uptick in demand for physical bullion, with the Bloomberg headline below summing up the changing mood.

Source: Bloomberg

Indeed ABC Bullion has been a beneficiary of this trend, with our recent announcement that we are now accepting Bitcoin as a payment option for physical precious metals being very well received by clients new and old.

Many of these investors are quite sensibly looking to convert some of the fast-money they’ve made in cryptocurrencies into wealth of a more tangible kind, with the latest crypto crash adding some urgency to this wealth transfer.

It’s not just cryptocurrency bulls that should be looking at gold either, but indeed all investors, as financial markets the world over at risk of a potentially significant pullback.
Over at The Macro Tourist blog (which is well worth following) a 16th January update points out that Ralph Acampora, the so called ‘Godfather of Technical Analysis’ is so bullish on equities, he needs to ‘sit down and calm down’.

As Kevin Muir (the author of the blog states), _“_when the strategists are biting the pillow to stop themselves from screaming in joy, it’s time to think about going the other way.”

You can read that blog in full here.

It is no wonder that investors are so optimistic on stocks right now. Tax reform has been passed in the USA, analysts are upgrading earnings forecasts, global growth is accelerating higher, central banks are sounding ever more optimistic about markets and the economy, debt is still cheap and yields on defensive assets are still low.

What’s more – investors have become so use to this bull market, they can’t see any catalyst that would cause it to end. To help visualize how long it has run for, and more importantly how smooth the bull market in equities has been since the GFC low, consider the chart below. It comes from a Collaborative Fund blog titled “The Thrill of Uncertainty” and it highlights three different decade long time periods in history over which investors have doubled their money in stocks.

Source: Collaborative Fund

Those three time periods (1922-1932, 1926-1936, 2007-2017) were all incredibly different in terms of the path stock prices followed to double investors money, with the 1922-1932 period seeing the wildest swings in value, owing to Roaring 1920s and the Black Tuesday crash of 1929.

Conversely, since the GFC “ended”, investors in this stock market cycle have seen an almost uninterrupted increase in the value of their equity portfolios, with the last nine years helping lull investors into what is almost certainly a false sense of security.

As the Collaborative Fund blog states, whilst it’s been true to state that stocks average 7.5% a year (returns most investors assume will continue), there are occasions where markets “go nowhere for 20 years”. Given the price investors are paying for a dollar of earnings today (let alone a dollar of sales), there is a decent chance equity returns will underwhelm in the years ahead, which will push investors toward alternative assets.

Gold meanwhile just keeps on keeping on, generating yet another year of solid returns in 2017, even though investor interest in the yellow metal has declined dramatically.

The chart below, which comes from a just released World Gold Council report, highlights the performance of gold relative to mainstream asset classes in calendar year 2017, as well as over 10 and 20 year periods, and since 1971.

Source: World Gold Council

As you can see, gold more than held its own last year, strongly outperforming all assets other than US and EAFE stocks, whilst over a 10 and 20 year period, as well as since 1971, its been the best performing defensive asset class by some margin.

We expect this solid absolute as well as relative performance to continue this year, even if we could see a short-term corrective move back toward USD $1302oz.

A strong year for gold will almost certainly occur should the US Dollar continue to weaken, and/or if inflation begins to stir. The fact that gold has risen in the last few weeks despite the increase in bond yields suggests the market is definitely beginning to worry about the latter.

We are clearly not alone in that assertion either, with David Stockman, White House Budget director under Reagan, recently stating that “gold is the only safe asset left” in a recent interview with USA Watchdog.

For long term gold and silver investors, the best approach is to stay the course, or even add to your holdings provided that suits your circumstances.
For those investors who are new to precious metals and are looking for some sensible diversification in their portfolios, adding gold and silver to their portfolio may be the best decision they make in 2018.

Until next time,
Jordan Eliseo
Chief Economist
ABC Bullion

Disclaimer
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