What if Bitcoin just topped? What does it change for the price of gold going forward?
Many years ago, people wanted to buy gold but didn’t really want to store it in their homes, pay for safekeeping and insurance during transport, etc. The demand gap was filled by all sorts of e-gold, e-bullion, and overall pooled accounts. This idea might seem odd to those new to the precious metals market, and writing about it makes me recall that scene from the Lord of the Rings movie.
“I was there, Gandalf, 3000 years ago…”
Says Elrond, while describing the weakness of men and how it contributed to Middle Earth’s status quo.
So, yes, I was there when e-gold was gaining popularity. Whether there really was any physical gold backing up those e-gold accounts (and not just hedges through futures contracts) remains unclear. The uncompromising analysts claimed that unless you hold it in your hand, it’s just “paper gold” and not a real thing that would provide protection in case of severe financial turmoil. Some said that as long as you have the serial numbers of the same bars you own, it most likely exists and provides real protection.
Then came the ETFs – SPDR® Gold Shares (NYSE:GLD) was launched in 2004, and iShares Silver Trust (NYSE:SLV) was launched in 2006 (triggering a local collapse of silver prices, puzzling many who were not aware of the buy-the-rumor-sell-the-fact type of reaction on the market).
The debate about whether they are backed by physical metal continues. And the more evidence (“evidence”?) one side (believers / those who doubt those metals’ existence) provides, the more backlash it generates on the other side.
On a side note, some ETFs allow in-kind redemption of physical metals (like, you can go there and pick up the bars), which implies that they have to be there, which might be the sweet spot for those willing to balance convenience with security.
And just when it seemed that the situation of the fiat currency alternatives and the means through which one could own them is stable…
Cryptocurrencies arrived, and they completely changed the landscape.
At first, it was just Bitcoin, but others soon joined it.
To be honest, I did hear about it many years before it got popular, but I just shrugged it off as something rather uninteresting. And I ignored my hunch to buy some, just in case. Lesson learned – having a hunch is essential for knowing about something before others (and trusting that insight). Sometimes, the market and investors creating it are so much in denial of something about to become huge that those “unclear periods” take much more time than they should (looking at it objectively).
Remember the very early part of the pandemic? Looking back with the benefit of hindsight, most things that happened would happen, but ignoring them was just too easy.
Precious Metals and the Arrival of Cryptos
When cryptos arrived, they were like the new, cool kid in the neighborhood. The future finally arrived! A true alternative to the dollar, euro, yen, and other fiat currencies that is not bulky. And it had this “futuristic” vibe to it.
Just like gold and mining stocks, but cooler, with more potential.
Or so it seemed.
The precious metals and cryptocurrency markets became more and more similar over time. Not fundamentally, but through investors’ perception.
Bitcoin was the flagship metal with a big price tag per unit – just like gold (and its price).
Ethereum became the more useful (intelligent contracts) counterpart that was still cheaper in nominal terms – just like silver (and its multiple industrial uses, smaller stockpiles, and so on).
Finally, there were many altcoins (*cough* shitcoins *cough*) that promised quick riches – just like junior mining stocks. Some of those altcoins provided massive gains, just like some junior miners that found a rich deposit. And some altcoins just wasted all invested capital, just like some junior miners that filed for bankruptcy protection.
At first, there were bigger differences in their price moves. They reacted adversely to USD Index’s movement (well, they were alternatives to fiat currencies, so it’s no wonder this was the case) in somewhat different ways. However, over time, those differences started to fade away.
Gold, Silver, Miners, and Bitcoin - Technicals
Nowadays, the cryptocurrency and precious metals markets seem pretty synchronized.
Please take a look at the below chart for details.
The upper part is Bitcoin and the lower part is gold (orange), silver (well, silver), and the HUI Index – a proxy for gold stocks (brown).
The last time Bitcoin and PMs moved differently was in early 2022. Back then, gold, silver, and mining stocks moved higher in a visible manner, while Bitcoin moved higher very modestly.
Bitcoin’s performance back then is understandable – it was after a double-top, and it didn’t have the strength to rally one more time.
Since then, both markets: precious metals and cryptocurrencies, have moved in a rather synchronized manner.
Namely, after the early-2022 top, they all fell together.
Bitcoin topped above $60k (actually, I wrote about the top being in or at hand when Bitcoin was trading close to $50k), and it declined to $15k. That’s when I wrote that it was bottoming – and indeed. It started to rally from those levels.
By the way, do you remember how bearish everyone was then? It was exciting to see how excessive bearishness is bullish and vice versa. When Bitcoin was above $50k, everyone and their brother was in the “to da moon!” mode.
While Bitcoin was declining and correcting, the same thing happened in the precious metals market. And out of the trio mentioned above, gold, silver, and mining stocks, the latter’s price movement was most in tune with what happened to the Bitcoin price.
A Warning For Investors
This brings me to the reply to the unasked question:
Why am I writing about the Bitcoin market in today’s analysis of the precious metals sector?
The point is that something significant happened in the Bitcoin market, and I wanted to build the foundation for the technical link between the two markets. It’s not coincidental that they moved together – it has a lot of sense on the fundamental level.
This, in turn, means that indications coming from the Bitcoin market are likely to translate into the outlook for the precious metals market, particularly into the outlook for mining stocks.
So, what is the Bitcoin chart saying right now?
It’s saying, “Hey, my rebound is probably complete, and I’m about to slide.”
If you look at the chart, you’ll notice that Bitcoin moved to the dashed line and then moved back down. This line is based on the previous 2021 low regarding the weekly closing prices. Bitcoin recently moved above the 2021 lows in intraday terms but didn’t move above it in weekly closing price terms. Weekly closes are generally more critical than intraday price extremes, so the breakdown below those levels was verified.
This means that the top in Bitcoin is most likely in. Especially in nominal terms, the price doubled from its recent low. Markets (not just precious metals and stocks, this applies to other markets, like forex and crude oil, copper, and other commodities) tend to like those round numbers - this applies not only to price levels but also levels based on performance. And speaking of round numbers, The $30k level that Bitcoin reached recently is also a round number.
The above also makes sense from the fundamental point of view. The CBDCs (central bank digital currencies), a.k.a. gov’t cryptos, are starting to take shape. And suppose the governments and monetary authorities want to impose using their cryptos. In that case, it will be relatively easy for them to ban outright or tax the use of other cryptos like Bitcoin. This risk is rising, so the appeal for cryptos will likely wane.
That’s the fundamental problem I always saw with Bitcoin. When it becomes so big that it threatens the monetary status quo, the Powers That Be are unlikely to give away their economic power just like that. Wars were waged for that… Moving toward CBDCs means that they accept that something will have to change but still want to retain control of that change (or use this as an opportunity to increase it).
So, as Bitcoin declines again, the precious metals are likely to decline, and mining stocks will likely be affected to the greatest extent.
The bottom of the chart reveals that gold stocks’ performance was feeble recently compared to gold. And when Bitcoin slides, this is likely to be magnified. Those positioned to take advantage of those moves will likely be rewarded exceptionally well.
And just like it seemed unlikely that cryptos would rally at all and then plunge from $60k (and then double from $15k), the “unlikely” slide of the precious metals and – in particular – mining stocks will likely take many by surprise. You have been warned.