Has bitcoin stolen gold’s thunder?
Since July gold has once again flourished, this time on geopolitical instability and is up a very respectable 10%, but bitcoin has nearly doubled over the same period – begging the question over whether a fundamental shift has occurred in the way gold is viewed by traders and investors?
Nonetheless, gold appears to have made an important break-out suggesting more gains are on the way. However, they might not be that spectacular as some of its traditional followers are being lured into crypto-currencies. Interestingly most of the activity in bitcoin is apparently in Asian currencies, possibly reflecting tensions between North Korea and the US / Japan.
But his second explanation is far more interesting and potentially convincing. Gold may have a usurper in town in the form of crypto-currencies such as bitcoin, ethereum and litecoin. Bitcoin is up 350% so far this year whilst ethereum has managed a blistering 4,000%.
There are some characteristics of crypto-currencies that gold bugs should love – hence they could be stealing market share from this millennia old safe-haven. There is no central authority controlling them, they cannot be created at will by central banks (creation of new bitcoins is constrained) – unlike fiat currencies such as USD or GBP, they are independent of governments and encrypted and therefore very difficult to trace and tax, and markets are growing around their use and transaction times are accelerating.
In effect, they’re seen as digital safe-havens and that could accelerate as governments try to digitise money – effectively making it easier to tax transactions and track all economic activity. And being digital, crypto-currencies are weightless, easier to store and to transact in than gold.
However, gold does have some advantages. It is as old as civilisation itself and culturally deeply ingrained. Also, gold’s existence does not rely on electricity and the Internet for its existence and in that sense, it’s very physical nature makes it more of a safe-haven.
Crypto-currencies are here to stay -- incompetent and spendthrift governments practically guarantee it -- but all the signs suggest they’re in bubble territory. The Internet is now full of get-rich quick schemes and scams riding on the back of their ascent with all kinds of speculators piling in with stories of overnight fortunes being made. Also, it has captured the imagination of the media – another sign that prices are becoming divorced from reality
Also, even as the supply of individual crypto-currencies is constrained by complex mathematical formulas for their creation, the overall supply of them is increasing rapidly with companies and individuals rushing to cash in on the boom with new crypto-currencies backed by clever marketing. It’s the ultimate form of alchemy.
Something will prick this bubble. It may come from regulators, central banks normalising interest rates or something more dramatic, such as stories of mass thefts of crypto-currencies by hackers. Overall it makes gold look like the safer of the safe-havens for now.
TECHNICAL ANALYSIS – Consolidation beckons for gold
Big trouble around North Korea is proving to be a wonderful tonic for gold as it challenges levels last seen nearly a year ago suggesting it has further to rally with the 200-day moving average (turquoise blue) having been crossed on the upside back in mid-July.
However, in the short-term it could be nearing a period of consolidation with the daily RSI straying into over-bought territory at 72 (the previous times that happened this year led to consolidations or pull-backs) and it is riding on the top of the upper Bollinger band, which also suggests a pullback is near.
Resistance can be seen around USD1,339, 1,342, $1,352 1,356-8 with support at 1,308 1,291-2, 1,283 and 1,271-2.
By Justin Pugsley, Markets Analyst, MahiFX