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15 March 2017

Gold, and Bitcoins

This article was written by Richard Horswill. All views and opinions expressed are strictly his own.

For years gold has been an indicator of market stress and an asset with ‘safe haven’ status. It can act as a currency, a hedge against devaluation - as we saw during sterling’s wild knuckle ride after the Brexit vote - but it also has a straightforward value in its physical form. It can be useful when it is held outside the financial system. In the event of a banking crisis, as we saw in March 2013 in Cyprus, a bank bail-in effectively confiscated as much as 60% of the value of some customers bank accounts, and even the smallest saver lost something in the region of 7%. Such a situation suggests that  a proportion of an individual’s wealth should be held in this historic alternative asset class; most importantly, though, such holdings should be physical, kept well away from the paper Ponzi scheme that has developed out of the current fractional reserve banking system. A kind of insurance policy.

Bitcoin, modern day insurance

Because the gold market has been diluted by various expansion schemes in an attempt to protect the integrity of the highly leveraged fiat currency system we have been on since the Nixon shock of August 1971, gold has not necessarily been able to act in its traditional way. Other than its 1980/81 spike up to $850 per troy ounce, the monetary gods have seen fit to control the natural balance mechanism between  gold and the paper promises today's money represents. Central bank leasing of gold reserves, ETF 'paper' gold trading, and an out of control paper futures market that allows leverage ratios in the region of 100 to 1 have all acted to suppress the natural role of gold.

Now, though, the decentralised Bitcoin crypto-currency is showing us how a "limited supply" asset class should behave when geo-political crises strike, wars erupt, monetary expansion via the printing press occurs and the threats of currency devaluation and trade wars appear on the horizon. With no way of increasing the supply artificially, investors are understanding the benefits of this maverick crypto currency. The manipulation game in gold cannot be reproduced in the decentralised crypto space, so Bitcoin and other lesser known crypto-currencies are rising in popularity as their benefits are more widely understood and observed.

The China effect on Bitcoin

China has a very particular problem as the manufacturing hub of the world. In order to maintain its export advantage it needs to weaken its currency against its rivals. However, the dollar peg means that as the dollar has recently hit 14 year highs against a mix of other global currencies, the yuan and thus China has been losing ground to its manufacturing rivals. China's advantage over other emerging low wage nations is disappearing. If it were blatantly to devalue the yuan it would almost certainly be branded a currency manipulator by new President Donald Trump. He has made it clear that any nation actively attempting to devalue its currency to gain export advantage will not be tolerated and has pointed the finger not only at China but  also Mexico, Japan and Europe (in particular Germany).

China is treading carefully so that that finger does not remain pointed in its direction and is actively supporting the peg; but at a significant cost. Its current account savings which at one point amounted to $4 trillion have dropped precipitously of late. It has spent over $1 trillion maintaining the peg up to now, but will not want to continue to do this indefinitely, essentially throwing away hard-earned cash. A significant one-off devaluation could be at hand, and of course wealthy Chinese investors know this situation could hurt them. Much Chinese cash has already been exported in an attempt to front run government capital controls. However, as these controls have started to bite, authorities have been forcing investment into alternative escape routes, Bitcoin being one of  them. The very real need to hedge against yuan devaluation is developing the Bitcoin brand and value in China and is slowly turning it into a form of crypto gold standard. It's limited supply means traditional supply/demand dynamics lead the way and it just cannot be manipulated in the same way as other commodities by the controlling elites due to its decentralised nature. Consequently, the value of Bitcoin of late has been on a roll and could well surpass the value of gold very soon. (Editor’s note: since this was written, this prediction has in fact been fulfilled.)

The future

Attempts to control global financial markets continue apace. As central bank academics try to impose their monetary wills, new ways to circumvent policies are found by equally clever monetary mavericks. The controls employed up to now to keep the current financial system afloat have been driven by the co-operating central banks of the U.S., Japan, Europe and the U.K. Their policy initiatives have ranged between zero interest rates and financial repression to direct negative interest rate policy; however, every time, the medicine employed needs to be stronger to keep the out of control train on the track. The signs are now pointing to the need for even stronger medicine in the form of a cashless society. Sweden is one country seriously considering this; however there are implications here, not just of financial control through negative interest rates, but also of personal freedoms. If the financial system were totally transparent to the people in charge, they could quite literally shut down anyone or anything they felt could undermine them. A disturbing level of control… Cash is being pulled from circulation in some countries. The withdrawal of  high denomination Indian notes has led to disastrous results for the population, and chatter from highly influential US economists regarding the $100 note disappearing from American streets has also not gone unnoticed. These events and the direction of travel of nervous global monetary authorities are highlighting the need to diversify away from the norm. Bitcoin and other crypto-currencies provide a way to take back control. To an extent, they have similar underlying attributes to that of gold. The crypto space can only really gain further traction in the coming years as the current global financial system moves further towards self preservation mode. As the old saying goes, the trend in this case is definitely your friend. 

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