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Drop Gold, Buy Bitcoin?

03 May 2019

Precious Metals Commentary

It was a rather boring week for the precious metals until Fed Chair Powell’s comments at a press conference were interpreted as meaning less of a chance the Fed would cut interest rates. It caused the US dollar to bounce, and correspondingly, gold took a hit breaking below the $1,278 floor it had established this week, currently holding just above $1,270.
Gold US

Silver followed gold down but was much weaker, possibly influenced by a plunge in copper, and is currently trying to hold above $14.60. Silver’s continued weakness relative to gold has pushed the gold:silver ratio to a level it hasn’t seen since October 2008.

While ratios above 80 have historically been good times to switch or go overweight into silver, on a “trend is your friend” basis it is hard to argue with an eight year long increase in the ratio, which implies silver underperforming relative to gold.

With the Aussie dollar also weakening on the Fed news, breaking below the round 0.70 and struggling to get above that level, most of the US gold price fall was mitigated, leaving $A gold even for the week at $1,817 and silver down 50 cents for the week, currently around $20.88.
Gold AUD Silver Manipulation
Last weekend, Former Commodity Futures Trading Commission (CFTC) Commissioner Bart Chilton died at the age of 58 from the effects of pancreatic cancer. Bart was famous within the silver community during his 2007 to 2014 stint as a commissioner as he was known to respond to mail from the average investor and, as GATA remembers“did what he could to legitimize the market manipulation issue without violating what he understood as the confidentiality requirements of a regulatory agency”.

Bart did attract a lot of criticism from silver investors when the CFTC closed its 5-year and 7,000 staff hours investigation into the silver market in September 2013. At the time, the CFTC said that “based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action”.

Note that the CFTC did not say there was no wrongdoing, just that there was no “viable basis” for a case. In a recent interview with Chris Marcus of Arcadia Economics, Bart confirmed that there was suspicious activity by traders but that an external forensic economist advised the CFTC that it was not enough to win a case. Bart said that he convinced the other commissioners to get another expert opinion, but this also agreed there was no case.

We think it is important to note two distinctions with respect to market activity:
  1. What is legal does not necessarily equal to what is ethical.
  2. Manipulation (short-term & tactical) is not the same as suppression (long-term & ongoing).

A lot of gold and silver bug indignation about a lack of action by regulators, and we think unfair criticism of Bart Chilton, stems from not appreciating that unethical market behaviour may well be legal, or at least not provably illegal in a court.

Bart said in the interview that he did manage to get the law changed so that the standard of proof was similar to that which applied to securities. In his opinion, if that new law was in place at the time the CFTC would have been able to make a case. In doing this, Bart was helping to counterweigh the stronger access and lobbying power that companies have to shape the law to create grey space between what is ethical and what is legal. We don’t think he was recognised for this.

Since the CFTC case closure, there have been many class actions and civil lawsuits against various bullion banks, with the provision of chat logs by Deutsche Bank as part of a settlement being the most revealing with traders talking about how they “shade”, “blade”, “muscle”, “job”, “spoof” and “snipe” the silver market.

While the court of public opinion has ruled in favour of price suppression, the chat logs seen so far are examples of manipulation and not suppression. The lack of explicit evidence or chats discussing management of a large naked futures short position and/or plans to suppress the price over long periods of time means that the suppression case ends up relying on academic/forensic econometric/statistical analysis of price movements within and between futures and spot markets. This is a harder (legal) case to prove than manipulation.

To-date attempts to prove manipulation in the courts have not had substantial success in the civil cases, but the CFTC has won some cases against banks and traders for short-term manipulative spoofing of precious metals futures. With such a mixed bag on the much easier to legally prove manipulation front, and Bart’s view that regulators and prosecutors are under-resourced, we feel it is unlikely that a case for suppression will make it to court any time soon.

Inflation Expectations

We noted last week that Australian inflation was under the RBA’s target range. It was zero in the March quarter and is only showing 1.3% for the year. This contrasts with Australians’ expectations for inflation, which Roy Morgan is reports is currently around 4% per year.
Roy Morgan chart

While this measure has been trending down, it looks to be constantly around 2-3% higher than the official inflation figure (which has also been falling). Another data point we think that CPI does not reflect the actual inflation rate being experienced by the average person, an indicator of which is given by the CBA’s “pain spend” calculation as shown in the chart below.

The Pain Spend

The fact that “pain spend” costs have been above wage growth for much of the past 15 years may have something to do with falling personal credit growth, to the point where it is actually going backwards. As CommSec reports, in aggregate, people appear to be paying off their credit card debt, with the current “ungrowth” rate at 17-year lows, pointing “to a deleveraging of household balance sheets” that along with growth rate of term deposits near two-year highs, means “Aussies are saving more and spending less –not good news for retailers or the broader economy”.
Credit card debt fallsWe are not sure how much of a benefit that saving will provide with economists expecting the RBA to cut interest rates, as term deposits rates will just keep going down. While this policy cuts into the spending power of retirees, the fact that Australian household debt is $2.4 trillion versus deposit balances of $1.1 trillion, means that in aggregate, the eggheads see households as a “sector” being net better off. Other benefits of lower rates, according to AMP, include “supporting commercial property, infrastructure and shares offering sustainable high dividends … bring forward the timing of the bottom in Australian house prices”.

So the message to retirees and others looking for safe returns seems to be to just take it on the chin for the benefit of Australia as a whole. It seems we don’t want to give up our 110 quarter long economic expansion.
Lenght of Economic Expansions

The other asset that does well when interest rates fall relative to inflation is gold, as the opportunity cost of holding gold declines. However, this effect really kicks in when inflation is rising, or is expected to rise. While rising inflation isn’t the market’s current expectation, the risk that politicians grab on to modern monetary theory (as it helps justify their pork-barrel spending ambitions) is worrying investors and policy makers like Warren Buffett, Fed Chair Jerome Powell and IMF boss Christine Lagarde according to Bloomberg, who quoted billionaire businessman Carl Icahn as saying “You can print money up to a point, but after that point, it could become very dangerous. Once you get into an inflationary spiral, it’s very difficult to get out of it -- and therein lies the danger”.

Low interest rates are not all positive, with independent research provider TS Lombard noting that US companies are now spending more on buying back their shares than on actual productive stuff like capital equipment.
US buybacks

As Ben Hunt from Epsilon Theory says, accommodative monetary policy drives such behaviour because “why in the world would management take the risk … of investing for real growth when they are so awash in easy money that they can beat their earnings guidance with a risk-free stock buyback”. That does not strike us as a good thing for the economy as a whole.

“Drop Gold. Buy Bitcoin!”

Crypto investment firm Blockchain Capital released results list week from its survey of 2,029 American adults on attitudes towards Bitcoin. Since their last survey in October 2017 the percentage of people that have heard of Bitcoin rose from 77% to 89% in April 2019.

They are reporting that 11% of the population own Bitcoin, although unsurprisingly the majority of that is in the younger age groups.
Bitcoin ownership rates

Note that this is a percentage of people holding Bitcoin, not percentage of total investments. Bitcoin has a total market value of only $95 billion, compared to the value of all the gold in the world of $8,100 billion.

In terms of investment preference, gold is still favoured with only 12% of people saying they would prefer Bitcoin over gold.
Bitcoin preference rates

We do note that the question asked was only about what they would prefer to own $1,000 of. We think that use of such a small amount in the question probably skews the results in favour of higher Bitcoin preference as it is not much to lose. The results are likely to be much different if the question was what percentage of your total portfolio of investments would you put in Bitcoin.

The other way to read this chart is that 88% of people prefer gold over bitcoin. This fact is likely what is behind crypto asset manager Grayscale launching of a mass marketing campaign calling for investors to ditch gold in favour of bitcoin, which comes with a pretty blunt URL and tag line “Drop Gold. Buy Bitcoin!”.

We have seen many people argue along the lines “hey crypto bros, don’t fight us goldbugs, we both have the same enemy – fiat fans”. The fact that Grayscale decided that the campaign should be DropGold, not DropFiat, is in our opinion because the brutal marketing calculation is that it is harder to convince mainstream investors to move from fiat-based investments to crypto.

To do that is two-step process:
  1. First convince someone there is a problem with fiat-based investments.
  2. Second, convince them crypto is the solution.
Gold investors have already been convinced of step 1, so it is easier marketing-wise to do a “DropGold” campaign as you just have to convince gold investors crypto is a better solution.

A question we have is whether this Grayscale campaign will result in the crypto industry is moving beyond “cold war” tactics of appropriating gold’s “brand” by use of gold coin imagery and terms like “mining”, to a more explicit “hot war”.

Whether gold or crypto is a better “solution” is a debate for another time, but we hope investors have been cautious with any investments in crypto currencies, and have taken advantage of ABC Bullion’s ability to accept Bitcoin and to convert any profits into the more stable solution that is gold.

Until next time,
John Feeney and Bron Suchecki
ABC Bullion
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at, or call us during trading hours on 1300 361 261.

This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.