Why You Should Like What Bankers Don’t…

Watching daily stock price movements can be dull at the best of times.

That’s one of the reasons why I enjoy analysing the price of gold. Gold’s daily price action tells you just about everything you need to know about what’s happening in the markets.

A $5 overnight rise in the gold price signals that nothing worthy happened.

However, a $20 or $50 price move lets you know that there was a significant geopolitical event that took place.

A huge jump in the gold price also tells you where to look in the markets. A higher gold price means a weaker US dollar. Possibly a jump in crude oil prices as well.

Generally, a big leap in the precious metal’s price means some sort of central bank or government intervention took place.

Of late, not much has been happening with gold. The yellow metal has been range-bound for over a month, stuck between US$1,270 and US$1,290 an ounce.

The lack of price action is frustrating short-term traders. Not that gold bugs mind. They buy gold for its long-term store of wealth.

In stark contrast to all this, there’s bitcoin

As I look for market cues from gold each morning, I always make sure to check what bitcoin did overnight.

Unlike gold, bitcoin isn’t going higher because of the words of some bureaucrat or central bank. It’s rising simply because investors are rushing into it.

To be frank, the rapid and almost uncontrollable rise of bitcoin is exciting.

Less than a month ago, a single bitcoin was worth less than US$7,000. Back at the start of November, crypto analysts were making guesses on when bitcoin would crack the US$10,000 mark.

Two weeks ago, one crypto entrepreneur said it would hit that mark in January next year.

Well, in case you weren’t paying attention, bitcoin hit US$10,000 (AU$13,163) last Wednesday. Less than 24 hours later, the crypto pushed past US$11,000 (AU$14,478).

Shortly after that, it dropped a massive 20%. Sections of the mainstream were screaming that it was time to get out of the crypto craze before it was too late… 

Come this morning, bitcoin had rebounded, trading at US$11,060 per coin.

Don’t get me wrong; some traders are diving into cryptos looking for a way to make a quick buck. Which many mainstream analysts use as a reason not to buy cryptocurrencies.

Yet mainstream analysts struggle to understand bitcoin. The reason is because they are approaching it from a traditional mindset. They are taking everything they know about markets and trying to get bitcoin and other cryptos to fit neatly into that box.

But bitcoin challenges everything we know about the fiat currency monetary system. So that approach doesn’t work.

The modern system relies on trusting a third-party. That third-party is a central bank or government. The idea is that these institutions create the money supply and policies to stabilise the value of currencies.

In doing this, they slowly tweak and fiddle with how much money is in circulation. This way, central bankers believe they can engineer asset-price inflation. That is, how much the value of assets goes up. If they control money, they can decide what it’s worth.

Cryptocurrencies flip that idea around. The coding behind cryptos is set up so that people decide what it’s worth. The more people there are buying a certain crypto, the more valuable it gets. If lots of people sell it, it causes the value to drop.

All this buying and selling has created volatility on the crypto market. However, it’s most visible in bitcoin, through the rapid price rises and drops we are seeing at the moment.

This volatility has given the mainstream an easy way to brush it off. ‘After all,’ they say, ‘do you really want to hold a currency when you don’t know what its day-to-day value is going to be?’

That, quite frankly, is insulting to the ingenious coding behind bitcoin. Bitcoin will only make 21 million coins available. Ever. Unlike the money you have in the bank account or wallet. The value of which you have no control over.

Make no mistake: Bitcoin is soaring to new highs every week. However, the insane price rises aren’t over yet. The investors flooding into cryptocurrencies are doing so because they’ve lost faith in the financial system. People don’t want to trust the banks any longer. And a decade of low interest rates and monetary stimulus means they don’t trust central banks either.

Kind regards,

Shae Russell,

Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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