Bitcoin Could Crash Another 50%, Or More, But Gold And Gold Stocks To Advance
Rearguard action in Bitcoin may be too little too late - the cryptocurrency could well see another 50% decline or more!
Gold and gold stocks would probably be the best investments in a general economic collapse if it occurs.
Governments are unlikely to remain on the sidelines and are likely to regulate bitcoin given its increasing use by criminals and in tax avoidance.
I'm sure it won't have passed many, if any, readers by that bitcoin has come off its highs this month and retraced almost 50%, a percentage fall that has even been surpassed in some other of the myriad of cryptocurrencies which have been launched to climb on the bandwagon. Personally I have not been a believer in bitcoin - a position that perhaps was not a popular one during the crypto's meteoric rise in the second half of last year. I have long held the opinion that the rise, which made fortunes for many early bitcoin holders, was a very definite bubble and that the cryptocurrency would crash back whence it came - effectively to zero or thereabouts. That may be overstating the position but I definitely see more losses ahead for recent bitcoin investors.
There has been something of a hiatus in the past 3 weeks in bitcoin's fall. It may have stabilized temporarily to between $9,000 and $11,000 as investors and perhaps existing holders seek to buy into it seemingly on the cheap, but I suspect that more falls lie ahead despite what some analysts see as a typical Fibonacci 50% retracement. I personally think more pain is in the future for bitcoin investors and if the psychological $10,000 level is again breached on the downside we could well see another 50% decline - or even more. In short I firmly believe that bitcoin is a particularly dangerous investment at the present.
Bitcoin's rise to close to $20,000 seems to have been definitely a step too far. As is always the case with investment bubbles it was fueled by investors climbing in to what they saw as a 'sure thing', seduced by what appeared to be an unending surging unit price. Some commentators and bitcoin promoters were predicting a bitcoin price of $50,000, or even $100,000 over the next few months and as long as investors continued to buy in that could indeed have come about. But like almost all good things the spectacular rise appears to have come to an abrupt end at around the $20,000 mark - a price too far?. Writing on my own website I had gone on record as suggesting that the leading crypto might peak at $10,000 - but it quickly rose through that level to double it before the market seems to have decided enough was enough.
What had been fueling the rise was confidence - the investor confidence that cryptocurrencies would continue to rise ad infinitum and the warning signs that they might be running too far too fast were largely ignored. One of the supposed strengths of bitcoin was that it was unregulated and thus uncontrolled. While genuine law-abiding investors had been buying in so had the criminal fraternity. It became a perfect uncontrolled, and untraceable, money laundering and tax avoidance route - and it will certainly hardly have gone unnoticed that virtually all criminal computer ransomware attacks have been demanding payment in untraceable bitcoin as the quid pro quo for unlocking affected computers - and eases the path of criminal enterprises to pull in revenues.
Anyone who thought that governments would be unable ultimately to regulate bitcoin to some extent are likely to be disillusioned. Anything which costs governments tax monies and aids the criminal element in modern day society is bound to be subject to concentrated attack from the powers that be.
Bitcoin, to advance in price, requires the confidence of potential investors that it will do so - in that respect it parallels a Ponzi scheme. That confidence has now been severely dented and if other markets, like equities, start to turn down confidence in the whole marketplace will begin to fall away and drive investors back to an asset class like gold which has mostly withstood the test of time.
Recently the World Gold Council has produced its own analysis relating to bitcoin and gold, as has GFMS in its latest gold market update. The former, which admittedly has a pro-gold agenda to protect, being primarily financed by the major gold mining companies, concludes that bitcoin is far too volatile to be a rival to gold in terms of long term wealth protection - and we would agree. The latter looks at bitcoin as a currency rival, and comes to a similar conclusion. While neither are necessarily predicting a further bitcoin meltdown the implications are there in that bitcoin is no rival to gold in terms of long-term investment stability.
And for the investor in gold bullion - particularly those who can store small bars and gold coins in a home environment - the yellow metal does provide good security in the face of a total financial collapse. Physical gold has always been tradeable, but that held in bank vaults may just not be accessible in a financial collapse and who would accept bitcoin - which is effectively just computer code - in such a scenario? If power is cut too, the bitcoin investor has no access to any store of wealth the cryptocurrency may theoretically provide.
What about gold stocks? They will probably do well in an economic collapse, but would an investor have access to the gains in a complete economic meltdown? Gold stocks, like bitcoin, may not be sufficiently available to trade to see one through in an apocalyptic economic decline but while bitcoin would probably collapse also, gold stocks and precious metals would likely gain substantially so would be there for the investor when economies pick up again, assuming those who may be holding the stocks on your behalf stay afloat.
In a recent comment at the Vancouver Resource Investment Conference, respected commentator Rick Rule suggested that gold stocks would do well this year and that the initial winners would be the gold majors. We recently picked Newmont (NYSE: NEM), Agnico Eagle (NYSE: AEM), Freeport (NYSE: FCX), Randgold (NASDAQ: GOLD), Gold Fields (NYSE: GFI), Sibanye Stillkwater (NYSE: SBGL), and the four gold royalty/streaming companies - Franco Nevada (NYSE: FNV), Royal Gold (NYSE: RGLD), Wheaton Precious Metals (NYSE: WPM) and Sandstorm Gold (NASDAQ: SAND) as our major gold stock picks for 2018 (see: Gold, Silver, Platinum, Palladium - Price And Stock Forecasts/Recommendations For 2018.) and all bar one have already seen good gains since we recommended them back in late December. To these we recently added Barrick Gold (NYSE: ABX) as being particularly likely to benefit from the current weak dollar/strong gold price in U.S. dollars due to the high proportion of its gold output being in the USA (see: Barrick To Benefit From Weak Dollar/Strong Gold).
So where are we looking longer term? While the worst case scenario of an apocalyptic economic collapse as outlined above is perhaps too unlikely to contemplate, we do foresee a possible sharp general equity price fall and continuing dollar weakness, with bitcoin retracing further. Precious metals prices and stocks may do well in the year ahead as a consequence. Interestingly the usually very conservative GFMS, in its latest survey noted above, is forecasting the gold price to reach US$1,500 at some stage in 2018. Should it do so gold stocks may do particularly well and with a much tighter approach to mega project capital expenditures the bigger miners should see good free cash flows and outperform the gold price itself this year after a year of underperformance in 2017.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
