Gold & Silver Are More Relevant Than Bitcoin - DeCarley Trading
Editor's Note: Carley Garner, president of DeCarley Trading, provided exclusive commentary for Kitco News' 2018 Outlook Series.
(Kitco News)- Gold and silver have taken a backseat to Bitcoin-mania,but they are still more relevant assets.
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| Carley Garner, president of DeCarley Trading |
Bitcoin has dominated the financial news cycle, but inthe long run, this particularcryptocurrency might be more bark than bite. Although the technology of blockchain and cryptocurrencies will live on, the way the financial markets havepinpointed Bitcoin as the end-all-be-all for the complex is arguably flawedlogic. The cryptocurrency idea is less than a decade old and will undoubtedlyexperience growing pains. Many believe Bitcoin is the start of a new eracapable of changing society in a manner similar to the internet. How soon wehave forgotten the struggles of technology pioneers. Remember Pets.com?
Considering the mania, it is hard to believe Bitcoin wascreated as an experimental currency and involves the practice of solving mathequations to “mine” the asset. Since when does doing algebra instantly create avaluable asset? Further, Bitcoin was never intended to be an investment vehicleand would likely prove to be less valuable than just about any tangible asseton the planet should the world undergo a calamity. In short, its astronomicalvalue is the result of perception not reality. This isn’t a new concept in the financial markets, but we’ve never seenemotions get this out of hand.
Some argue these characteristics are no different thanthose of gold; that is a reasonably true statement. I’ve always had reservations regarding thepracticality of gold being an efficient medium of exchange, but the truth is ithas been used by mankind for millennia. More importantly, the gold market isextremely deep. Investors in goldbullion, casual collectors, technology manufacturers, and those valuing itsbeauty, are all holding a piece of the pie. The Bitcoin market, on the other hand, is believed to be largely ownedby roughly 1,000 market participants with uninformed retail traders scramblingto bid up the price of scraps.
Despite the excitement over Bitcoin and the widespreadexpectations that it is a sufficient replacement for gold, there are someserious consequences of holding Bitcoin relative to gold that the market is notcurrently accounting for. These security risks might be enough to counterbalance theyearning for massive gains which might never be realized due to challenges inlogistics in liquidating cryptocurrency assets in an illiquid environment and alack of regulatory safeguards. To be clear, we are not fans of big regulationin the financial industry but we’ve been around long enough to know that somecommon sense regulation is necessary. In our opinion, the lack of governmentalcontrol over the brokerages offering cryptocurrencies flings the door wide opento opportunity for fraud.
For instance, oneof the appealing aspects of Bitcoin is the fact that it bypasses banks andother financial intermediaries. This introduces a counterparty risk that mostother financial transactions and assets aren’t exposed to. There have been a handful of Bitcoin brokersleave the business due to solvency or fraud issues. Those holding Bitcoin atthose particular brokerages are simply out of luck. In short, customers whowired funds to such brokers to “invest” (I use that term loosely in thisinstance) in Bitcoin in hopes of a get rich quick outcome, discovered theirfunds were used by the brokerage in other way and was gone. Even if their fundsdid go toward Bitcoin purchases, the assets were liquidated to satisfy prioritydebt holders of the firm leaving investors with either nothing to show fortheir efforts or initial principle or ina best-case scenario nickels and dimes on their dollar. Keep in mind, thesecounterparty risks apply only to those attempting to buy actual Bitcoin via thevarious brokerages offering the asset, it does not apply to Bitcoin futurescontracts. The counterparty risks ofBitcoin do not apply to Bitcoin futures in which alltransactions are guaranteed by the exchanges listing them (Chicago MercantileExchange and Chicago Board of Options Exchange). Nevertheless, Bitcoin futuresare (at least in theory) tied to the underlying Bitcoin price itself, soalthough the exchange guarantees the futuresmarket transaction itself, there is obviously no guarantee the trade will makemoney. In other words, the exchange ensures that speculators on both sides of the trade live up to their end of thebargain.
Also, the internet is riddled with stories of Bitcoinholders who have lost access to their Bitcoin assets due to hacked computers,compromised email accounts, or simply losing an associated pin number. Gold andsilver bullion investments, on the other hand, are generally sitting in a banksafe with protections most citizens wouldn’t be capable of employing on theirown. If the bank is robbed, there islikely some recourse to recoup the value whereas a Bitcoin holder digitally“robbed” of the asset will never be made whole. Accordingly, the new security risks associated with “investing” incryptocurrency are far greater than most are willing to admit. As flawed asgold is, it has a long history of survival and relevance. That is more than we can say for Bitcoin.
Now that we’ve established that precious meals are a morelegitimate asset than the existing cryptocurrencies, let’s peek into what mightbe in store for both gold and silver as we head into 2018. That said, wehesitate to make any bold calls in such a lengthytime horizon. A year is a long time and the fundamental backdrop can changedramatically. Recall late 2015, thestock market and most commodities were in the dumps but by early 2016 themarkets were stable and in some cases roaring higher. In other words, it isimportant that we avoid getting sucked up into the current narrative and keepour eyes open for shifts in sentiment.
Throughout the latter part of 2017, both gold and silver waffledin price due to a lack of interest. This isn’t surprising, traders are focusedon alternative assets such as Bitcoin, the stock market is performing betterthan nearly all periods in history, and there hasn’t been an immediate need forrisk off assets in recent years. Accordingly, precious metals have fallen victim to a lack of attention and trading interest. Nevertheless, sometimes the bestopportunities are in those markets the masses aren’t paying attention to.Eventually, the focus will change and investors will look toward the traditionalsafe-haven assets for a place to diversify. On a side note, I am the first to admit that gold and silver aregenerally volatile markets with little resemblance of safety but the factremains that the value of precious metals tends to rise along with uncertainty.Given the stock market’s ability to have avoided a significant correction forover two full years, it seems likely 2018 will bring some sort of equity marketpullback leaving investors yearning for alternative assets.
Gold Futures Chart
Gold futures appear to be poised to hold the $1,230 to$1,200 support levels as determined by uptrend lines. We’ve seen multiple goldslumps in recent years but they have all eventually been met with buying; wesuspect this time will be no different. If we are correct about that, gold should retest resistance at $1,350and if fundamental news supports it, a move toward $1,420 is in the cards. While we are not anticipating a run to$1,485, a significant unforeseen news event could trigger such a rally.
It is remarkable how well the Slow Stochastics indicatorhas worked in the gold market. Of thelast ten occasions dating back to 2012, nine buy signals triggered by theoscillator has resulted in a subsequent upswing. That said, the single failure taking place inearly 2013 was an utter disaster for anybody aggressively long the gold marketso caution must always be warranted. The Slow Stochastics indicator iscurrently displaying a buy signal (the oscillator is in oversold territory with a reading of 20 or below and the oscillatoris beginning to point upward). If the trend of successful Slow Stochasticsignals continues as expected, we should see gold recover from late 2017weakness.
Silver Futures Chart
The silver market hasbeen similarly “forgotten” by speculators. Thus, it too might be poised for a comeback. Whether it is a fizzle inBitcoin prices or the stock market, the precious metals market would likely bea direct beneficiary. Although few havenoticed, the silver futures market has shifted from a trend of lower lows toone of higher lows. We’ve yet to seehigher highs become a norm but there are definitely budding signs of a bullmarket on the horizon. Assuming thesupport range between $15.50 and $15.00 continues to hold, the bulls couldpress silver prices well into the $17.00s. Should a break of trendline resistance occur near $17.25 we could get aquick run into the low $20.00s. We are not expecting an immediate return to the$25.00 level, such a move cannot be ruled out should fundamentals make a sharpturn.
Conclusion
The metals markets have historically proven tobe subject to boom and bust cycles with the best booms occurring after lengthybust cycles. The emergence of Bitcoinprobably isn’t a game changer in the precious metals arena (yet). Years ofdirectionless trade on a lack of inflation worries combined with the market’sresponse to Fed tightening might haveresulted in pent-up demand for preciousmetals. If so, 2018 could be a breakout year. If not, at least traders should continue to feel comfortable gettingbullish on sharp pullbacks leading to oversold conditions on a weekly chart asdetermined by the Slow Stochastics in combination with standard technicalsupport analysis.
By Kitco NewsFor Kitco News
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