Monday Markets — Gold and Bitcoin (and Alts)

Monday,25 January 2021
Wollongong, Australia
By Greg Canavan

[5 min read]

Last week I wrote about gold. I showed you how closely it was correlated with the real interest rate. Given the huge increase in debt around the world over the past 12 months, it makes it even more unlikely that the global economy can handle any sustained increase in real interest rates in the years to come. Therefore, the long-term outlook for gold remains as strong as ever.

The shorter-term picture, as always, is far trickier.

Will the gold price have another leg down? Or is it bottoming here before moving higher?

It all depends on the strength of this ‘recovery’. That is, how will the global economy stand on its own two feet once the massive COVID-related fiscal stimulus subsides?

I’ve got my doubts on a self-sustaining recovery. So does the bond market. For all the talk of coming inflation, US 10-year bond yields are only around 1.1%. That’s hardly screaming strong recovery to me.

Sure, that could change in the months ahead. But so far, there is no decent recovery in sight. Which is why, I think, the gold price is holding up.

In response to last week’s essay, a reader asked about the gold miners, and their correlation to gold. It’s not as close as you think. At least not in recent years.

The chart below shows the HUI ‘Gold Bugs Index’ (black line) against the gold price since the secular bull market began at the start of the century.

During the first part of the bull run (up until 2011), gold shares ran ahead of the gold price. But when the bear market hit, gold stocks took a massive tumble. That was a result of a lot of questionable management decisions during the boom, which destroyed huge amounts of value during the bear phase.


Source: Optuma

[Click to open in a new window]

But while the gold price went on to new all-time highs last year, the gold stock index is still lagging. Ironically, most gold miners are in much better shape than they were in the first boom. There is no crazy M&A going on, just lots of cash generation.

That’s certainly the case for the Aussie gold stocks I follow.

This chart above tells you there is still good value in the gold stock sector. It only really emerged from its long bear market in 2020. That’s when the index hit its highest level since 2013. It’s currently consolidating the strong move made in 2020.

If we zoom in and take a closer look, you can see that initial support for this latest correction came in around the 2016 high. If this support area holds and prices start to move higher in the next few months, I think that will be a very bullish sign. Let’s see what happens.

I’ll revisit it down the track…


Source: Optuma

[Click to open in a new window]

Is one better than the other though?

Well, they both perform entirely different functions. Gold bullion is a hedge against monetary dysfunction, which necessitates lower and lower interest rates.

Gold stocks are a leveraged bet on gold. They come with all the risk that the stock market brings. From the top in 2011 to the low in early 2016, the HUI Index lost nearly 85% of its value. Now THAT’s a bear market.

Bitcoin or bust

As I mentioned last week, one reason for gold’s underperformance might have something to do with Bitcoin [BTC]. It’s been doing the job of gold and gold stocks since it took off in 2020.

Bitcoin is a polarising investment. While I consider myself an ignoramus on the technical intricacies of it, I do understand it from a big picture perspective.

Put simply, bitcoin is the free market’s reaction to an increasingly centralised and dysfunctional monetary system.

Bitcoin was born in 2008, in response to the financial system debacle of that year. It is everything that a government-produced fiat currency is not. It is decentralised, which means there is no central issuing authority. Its supply is limited, a feature that is hardwired into its design.

In fact, it takes more and more computing power to ‘mine’ bitcoin. The reward for mining bitcoin is that it strengthens the whole system.

So what’s happening here is that a free market digital currency is challenging government issued tokens. And the more dysfunctional the monetary system becomes, the more people will try to escape fiat and move into bitcoin and other cryptos.

Because it’s still early days for bitcoin and crypto in general, we’re still in price discovery phase. That means lots of volatility as the market tries to work out the value of these digital coins. But while  governments keep issuing huge amounts of debt, and talking about Modern Monetary Theory and central bank digital currencies, you can be reasonably sure the ‘intrinsic value’ of bitcoin will continue to increase.

What is the intrinsic value of bitcoin? It’s a good question. I was chatting to our in-house crypto expert Ryan Dinse about this recently. I’ll bring you the details of that conversation in Wednesday’s Insider.

Ryan, as you probably know, helms our premium Crypto Flip Trader service. The premise of the strategy is that it will move in and out of different crypto’s depending on the market. Ryan rode the bitcoin boom beautifully, but in recent weeks has started to ‘flip’ into different cryptos as other coins become good value relative to bitcoin.

I don’t want to give too much away. As I said, it’s a premium service. It wouldn’t be fair to paying subscribers to divulge Ryan’s trades. However, Ryan’s given me permission to republish some of his analysis on the bitcoin price action.

For context, Ryan wrote and published this last Thursday…


Source: COINIGY

[Click to open in a new window]

After the huge price run-up from mid-December, the BTC price appears to have paused for a breath.

But in the next week a chart pattern known as a “pennant continuation” — a bullish pattern — will play out.

If the BTC price rises above US$38,000 we could see it attack new all-time highs pretty quickly.

But if the pattern fails, we should see the BTC price fall; perhaps as low as US$30,000…and maybe even down to the next uptrend line (yellow diagonal line), which is at US$23,000 today.

Amazingly, even if it hit these levels, we’d still be in a strong uptrend. But it would hurt in the short term, no doubt.

Though if we see BTC anywhere near US$20–25K again, and you’ve money to spare, it would be a veritable “load up” point! Though bear in mind it’ll feel like the world is falling apart at the time.

Anyway, I don’t expect it to fall that far, and I think the US$30,000 level will provide some support even if the bull pennant fails.

From a trading perspective, if we do start to see the BTC price range between the US$30,000–35,000 level (the white lines), then that would be a good signal for us to start trading more into altcoins.

I’ve seen this story play out a million times.

When the BTC price is in a lull, bored traders move into alts. You can set your watch by it. So, we need to be ready if it happens.

Sounds like some flip trades are in the works!

Keep in mind this strategy is about building up a stake in bitcoin. It’s not about trading to increase your holdings of fiat. So when bitcoin looks like it will correct/consolidate, it’s time to move into other coins that should do relatively well.

Then, when bitcoin falls to buy/support levels (as Ryan identified above) you get back in.

Simple!

If you want to learn more about this method of crypto trading, you can sign up to Ryan’s free Crypto Fast Lane Summit, here.

I’ll be back on Wednesday with a discussion on bitcoin’s intrinsic value.

Continue below for Murray Dawes’ ‘Week Ahead’ update. Today, Murray shows you an activated carbon company that is coming back to life after having a tough time since the COVID crash.

Cheers,
Greg


[WATCH] It Has to Be Green

By Murray Dawes

The frenzy in anything green continues. We are getting to the point where penny dreadful stocks that haven’t rallied for years are starting to spike on no news just because they are green facing.

It will be important to sort the wheat from the chaff and enter stocks with a viable business model rather than chasing after anything that sounds green.

I think the stock I show you in my ‘Week Ahead’ update above is worth adding to your watchlist.

They were looking good before COVID struck and had a strong following, but the price crashed, and many traders would have been shaken out of the stock over the past year.

There are signs of life with strong buying coming into the stock over the last couple of days. It is still early days according to my charts, but their business should start to tick over again if GDP growth picks up.

I also give you an update on all of the stocks I have been showing you in these updates, so if you want to learn about my method of technical analysis, you will learn a lot by watching the video above.

Regards,

Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader