The Crypto Signal for the Precious Metals Market / Commodities / Gold & Silver 2023
What if bitcoin just topped? What doesit change for the price of gold going forward, if anything?
Many years ago, people wanted to buy goldbut didn’t really want to store it in their homes, pay for safekeeping andinsurance during transport, and so on. The demand gap was filled by all sortsof e-gold, e-bullion, and overall pooled accounts. This idea might seem odd tothose, who are new to the precious metals market, and writing about it doesmake me recall that scene from the Lord of theRings movie.
Says Elrond, while describing theweakness of men and how it contributed to Middle Earth’s status quo.
So, yes, I was there when e-gold wasgaining popularity. Whether there really was any physical gold backing up thosee-gold accounts (and not just hedges through futures contracts) remainsunclear. The uncompromising analysts claimed that unless you hold it in yourhand, it’s just “paper gold” and not a real thing that would provide protectionin case of severe financial turmoil. Some said that as long as you have theserial numbers of the exact bars that you own, it most likely exists andprovides real protection.
Then came the ETFs – GLD was launched in2004, and SLV was launched in 2006 (triggering a local collapse of silverprices, puzzling many who were not aware of the buy-the-rumor-sell-the-facttype of reaction on the market).
The debate about whether they are backedby physical metal continues. And the more evidence (“evidence”?) one side(believers / those, who doubt those metals’ existence) provides, the morebacklash it generates on the other side.
On a side note, there are some ETFs thatallow for in-kind redemption of physical metals (like, you can go there andpick up the bars), which pretty much implies that they have to be there, whichmight be the sweet spot for those willing to balance convenience with security.
And just when it seemed that thesituation in the case of the fiat currency alternatives and the means throughwhich one could own them is stable…
Cryptocurrencies arrived, and theycompletely changed the landscape.
At first, it was just bitcoin, but it wassoon joined by others.
To be honest, I did hear about it manyyears before it got popular, but I just shrugged it off as something ratheruninteresting. And I ignored my hunch to buy some, just in case. Lesson learned– having a hunch is important, and so is knowing about something way beforeothers (and trusting that insight). Sometimes, the market and investorscreating it are so much in denial of something that is about to become hugethat those “unclear periods” take much more time than they should (looking atit objectively).
Remember the very early part of thepandemic? Looking back with the benefit of hindsight, it was kind of obviousthat most of the things that happened would happen, but it was just too easy toignore it.
PreciousMetals and the Arrival of Cryptos
When cryptos arrived, they were likethe new, cool kid in the neighborhood. The future finally arrived! Truealternative to the dollar, euro, yen, and other fiat currencies that is notbulky. And it had this “futuristic” vibe to it.
Just like gold and mining stocks, butcooler, with more potential.
Or so it seemed.
The precious metals market andcryptocurrency market became more and more similar over time. Not fundamentally,but through investors’ perception.
Bitcoin was the flagship metal with a bigprice tag per unit – just like gold (and its price).
Ethereum became the more useful (smartcontracts) 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 juniormining stocks. Some of those altcoins provided massive gains, just like somejunior miners that found a rich deposit. And some altcoins just wasted allinvested capital, just like some junior miners that filed for bankruptcyprotection.
At first, there were bigger differencesin their price moves. They reacted adversely to USD Index’s movement (well,they were alternatives to fiat currencies, so it’s no wonder that this was thecase), but in somewhat different ways. However, over time, those differencesstarted to fade away.
Gold,Silver, Miners, and Bitcoin - Technicals
Nowadays, it seems that thecryptocurrency market and the precious metals market are quite synchronized.
Please take a look at the below chart fordetails.
The upper part is bitcoin, and the lowerpart is gold (orange), silver (well, silver), and the HUI Index – proxy forgold stocks (brown).
The last time bitcoin and PMs moveddifferently 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 isunderstandable – it was after a double-top and it didn’t have the strength torally one more time.
Anyway, since that time, both markets:precious metals and cryptocurrencies moved in a rather synchronized manner.
Namely, after the early-2022 top, theyall fell together.
Bitcoin topped above $60k (actually, Iwrote 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 – andindeed. It started to rally from those levels.
By the way, do you remember how bearisheveryone was at that time? It was very interesting to once again see howexcessive bearishness is actually bullish, and vice versa. When bitcoin wasabove $50k, everyone and there brother were in the “todamoon!” mode.
While bitcoin was declining and thencorrecting, the same thing happened on the precious metals market. And out ofthe above-mentioned trio: gold, silver, and mining stocks, the latter’s pricemovement was most in tune with what happened to the bitcoin price.
A Warning For Investors
This brings me to the reply to theunasked question:
Whyam I writing about the bitcoin market in today’s analysis of the preciousmetals sector?
The point is that something reallyimportant happened in the bitcoin market, and I wanted to build the foundationfor the technical link between the two markets. It’s not coincidental that theymoved together – it has a lot of sense on the fundamental level.
This, in turn, means that indications coming from the bitcoin marketare likely to translate into the outlook for the precious metals market as well– in particular into the outlook for mining stocks.
So, what is the bitcoin chart sayingright now?
It’s saying “hey, my rebound is probablycomplete, and I’m about to slide”.
If you look at the chart, you’ll noticethat bitcoin moved to the dashed line and then moved back down. This line isbased on the previous 2021 low in terms of the weekly closing prices. Bitcoinrecently moved above the 2021 lows in intraday terms, but it didn’t move aboveit in weekly closing price terms. As weekly closes are generally more importantthan intraday price extremes, the breakdown below those levels was justverified.
This means that the top in bitcoin ismost likely in. Especially that in nominal terms, the price doubled from itsrecent low. Markets (not just precious metals and stocks, this applies to othermarkets, likeforex and crude oil, copper, andother commodities, too) tend to like those round numbers - this applies notonly to price levels, but also levels based on performance. And speaking ofround numbers, The $30k level that bitcoin reached recently is a very roundnumber, as well.
The above makes sense also from thefundamental point of view. The CBDCs (central bank digital currencies) a.k.a.gov’t cryptos are starting to take a real shape. And if the governments andmonetary authorities want to impose using their own cryptos, it will be rathereasy for them to outright ban or tax the use of other cryptos like bitcoin.This risk is rising, which means that the appeal for cryptos is likely to wane.
Actually, that’s the key problem I alwayssaw with bitcoin. When it becomes so big that it threatens the monetary statusquo, the Powers That Be are unlikely to give away their monetary power justlike that. Wars were waged for that… Moving toward CBDCs means that theyaccepted that something will have to change, but that they still want to retaincontrol within that change (or use this as an opportunity to increase it).
So, as bitcoin declines again, theprecious metals are likely to decline as well, and mining stocks are likely tobe affected to the greatest extent.
Looking at the bottom of the chartreveals that gold stocks’ performance was truly weak recently compared to theone of gold. And when bitcoin slides, this is likely to be magnified. Those,who are positioned to take advantage of those moves are likely to be rewardedextremely well.
And just like it seemed unlikely thatcryptos would rally at all, and then plunge from $60k (and then double from$15k), the “unlikely” slide of the precious metals and – in particular – miningstocks is likely to take many by surprise. You have been warned.
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Przemyslaw Radomski, CFA
Founder, Editor-in-chief
https://www.goldpriceforecast.com
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