Sunday, November 24, 2013

As the Price of Bitcoin moves up and Gold moves down

Last week, the digital currency Bitcoin continued its strong, but volatile, move upward as the U.S. Department of Justice said it was a “legal means of exchange”. The recent strong price move up began on October 2, when the operator of the Silk Road web siteRoss Ulbricht, was arrested by the Federal Bureau of Investigation for allowing illegal purchases of drugs, guns and other illegal items using Bitcoins – this event limited the supply of Bitcoins.  Other drivers include increasing global interest, particularly in China; and funding for Bitcoin and virtual currency related startups such as BitpayCoinbaseCircle and OpenCoin. 
  • On Friday, the price of Bitcoin was $775, up from $144 on October 1 and $13 at the beginning of the year. 
  • For those interested in space travel, Richard Branson announced that Virgin Galactic will accept payments with Bitcoin.  
  • Note: because Bitcoin is technology driven and not created by any government, it has been referred to as “gold for geeks”.  

Separately, as gold prices remain under pressure, consider the following insights: 
  • Janet Yellen from recent U.S. Senate hearing - “Well, I don’t think anybody has a very good model of what makes gold prices go up or down... it is an asset that people want to hold when they’re very fearful about potential financial market catastrophe or economic troubles and tail risks. And when there is financial market turbulence, often we see gold prices rise as people flee into them.” 
  • Paul Singer’s Elliott Management, as reported by Reuters - “the U.S. Federal Reserve's quantitative easing policy has caused stocks to rise, fueling a form of inflation. In the portfolio, Elliott is adding to its bullish gold option holdings that aim for limited downside risk with a large upside potential, saying it still feels that fundamentals are uniquely positive for gold, 
  • the World Gold Council - “Gold demand to the end of the third quarter was 12% lower than the corresponding period of 2012. This is almost entirely due to substantial outflows from ETFs, Conversely, at the consumer level, demand for gold jewelry, bars and coins for the first nine months of the year was at a historical record of 2,896.5t, well ahead of the levels seen in the first nine months of 2012.”

  • Regarding Bitcoin –   the recent broad price swings are likely increasing its attraction to speculators, but discouraging its use as a way to purchase products and services. If price volatility declines and market demand expands, the roles of regulators, central bankers, FX traders and service providers could undergo significant changes.
  • Regarding gold – with negative investor sentiment at a high level, it could be attractive to contrarian investors.  If gold stabilizes and begins to move higher, investor memories could be short.

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