16 Mar Gold and Bitcoin

“There’s something happening here, what it is ain’t exactly clear.” – Buffalo Springfield

Both gold and Bitcoin are at dizzying highs. Why?

It’s easy to be seduced by the almost-universal levitation of everything – the Magnificent Seven, global stock indices, residential real estate, corporate bonds, etc. –, elevated to almost unimaginable heights by ever-increasing corporate profits, America’s robust GDP, promises of interest rate cuts and accelerating technological and AI revolutions. But that doesn’t explain the irrational exuberance seen in gold and Bitcoin. Both provide shelter during challenging economic and political times, but these are not those times …, are they? The outsized performance of gold and its digital cousin, Bitcoin, therefore is astonishing unsettling surprising in today’s bullish economic environment, one in which volatility and risk seemingly have been tamed … precisely as Cassandra predicted to TLR’s readers in June 2022 and again in July 2023: “Jay Powell and America’s Federal Reserve have proven themselves the most capable of economic generals. The Fed’s creative policy execution avoided depression following the Global Financial Crisis of 2008-09 and the Fed successfully navigated the world economy to a [15]-year period of consistent growth [from 2009-2024]. These are extraordinary accomplishments that few thought possible. The Fed in 2020 prevented economic calamity during the COVID pandemic … utilizing a flexible set of financial tools, testing them out, and honing them to a fine point.” Cassandra predicted that “the Fed will continue to [successfully] fine-tune America’s economy and achieve a soft landing” … and that’s precisely what it has done – gradually bringing down inflation without disturbing robust economic growth.

Why then are gold and Bitcoin levitating?

Bitcoin’s rise can be explained, though only in part, by the Securities and Exchange Commission’s approval in January of Bitcoin ETFs. Those ETFs quickly absorbed the significant overhead of retail demand, validating Bitcoin’s meme status as well as the appropriateness of Bitcoin for institutional investment portfolios … causing the value of Bitcoin to rocket from $46,000 in mid-January to >$73,000 this past week and confirming Bitcoin as the digital counterpart to gold. The two together therefore have become compatible hedges against feckless monetary, fiscal and geopolitical policies. The complementary status of gold and Bitcoin and their increasing value implies rising fear, fear that something adverse may be imminent. Perhaps it’s the fact that central banks have been huge gold-buyers with ever-increasing hordes of gold bullion – do they know something that the public doesn’t? …, or that there are increasing threats of nuclear broadening conflict from Vladimir Putin and by Iran, North Korea, China and their allies …, or could it be from an expanding awareness that the Dollar is declining in value and is gradually losing its hold as the world’s reserve currency …, or that America may be facing an imminent end to 15 years of economic expansion …, or … some other known or unknown risk?

Whatever the reason, while gold and its digital cousin are different forms of hedging instruments investments, there is one significant difference between the two: gold is money; Bitcoin is not. Money necessarily serves as a medium of exchange that is (1) widely used, (2) accepted in transactions involving the transfer of goods and services, and (3) a store of measurable value. Although Bitcoin today is indeed a store of measurable value, it is not widely-used in transactions … and there is no prospect that it can become a significant factor in the transfer of goods and services. Bitcoin therefore is an investable asset and a useful hedge against a level of calamity; gold, however, is money. The value of the two over time therefore can be expected to diverge in gold’s favor.

While the value of gold and its digital cousin have been rising, the mining companies that produce gold have experienced value erosion. An obvious reason for underperformance by the world’s gold mining companies is the influence of passive investing that has rewarded those companies that have momentum – notably the Magnificent Seven – and punished those that do not. Miners have been out-of-favor since the commodity crash that followed the Global Financial Crisis. Despite increases in the price of gold from $1,350 in mid-2016 to ~$2,200 in March 2024 – which has greatly increased gold miner value profitability –, shares of the world’s leading gold miners, Barrick, Newmont and their junior brethren, today are trading at lower prices than they were in 2016. For obvious reasons, the value of gold and gold miners over time necessarily will converge, and there are those who believe that that time may be fast-approaching.

The Dollar has been the global reserve currency – the very definition of “money” – for the past 50+ years. Prior to 1971, the Dollar was backed by gold. That worked until 1971, when America went off the gold standard and became responsible for maintaining Dollar stability via its status as the global hegemon with the world’s largest and most successful economy. As a result, the Dollar was accepted as the global currency and America became the preferred destination for an outsized share of the world’s products and services. That benevolent environment conferred an “exorbitant privilege” on America and its economy.

Do the rocketing prices of gold and Bitcoin serve as a canary-in-a-coal-mine-warning about threats to that privilege … and to economic stability? Central bank diversification away from the Dollar and into gold suggests so. Those who have been badly burned by past mistakes in “gold breakouts” nevertheless are cautious … with institutional investors remaining underweight. Although nothing in TLR is investment advice, it is worth noting that technical indicators no longer are sending “sell” signals regarding gold/gold equities and, precisely because of the Fed’s success over the past 15 years in suppressing economic instability, some key investors now are expressing gold bullishness. With gold equities at the highest levels of value-disconnection from gold, Bitcoin and overall asset appreciation, might the markets now be nearing an inflection point? Or is gold’s price breakout once again a head fake?

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Finally (from a good friend)