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12
2024
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The Secret Connection Between Bitcoin and Gold Prices
Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we’ll cover:
The bitcoin price driver nobody's talking about (and how it ties into gold) Bitcoin’s historic price surge over $100,000 has been the talk of the town lately. And just like with gold, nobody can quite seem to figure out the story. Just like gold, it has been gaining steadily, although the price of gold’s rise to $2,800 was slightly more abrupt last year. But what pushed bitcoin to this immense psychological level, from which it has immediately and slightly pulled back, also like gold? Trump's crypto-friendly appointee? …really? Ever since last summer, we have been highlighting how there is nothing mysterious about gold's rise. If anything, we should wonder why it hasn't gone up more, and many do. Bitcoin's case is more complex, but there is a tether here (not to be mistaken with the digital dollar Tether) connecting gold and bitcoin. You might have heard of that great old beast called inflation. As some will recall, the multi-trillion-dollar Bidenomics stimulus pushed bitcoin to a new all-time high seemingly out of nowhere, and the market pulled back in correspondence with the reported inflation rate. In other words, people didn't want to be in cash. While we have pointed to multiple fundamentals as driving gold's price move over the last 18 months, none have been more important than inflation. I, like many others, have come to understand that inflation is deliberately miscalculated, carelessly under-reported and a far bigger problem than the Fed or the federal government can possibly admit. (You've heard my take on this before, so I won't go into it today.) It's hard to argue this point when we're hearing about the normalization of a 4% inflation rate in the future. Wait a minute, when did we accept a 2% per year destruction of our purchasing power? In recent months, we have seen inflation increase despite interest rates higher than we’ve seen for decades. But that wasn’t enough, so the Fed gave up – now cutting interest rates, which anyone can tell you is massively bullish for gold. Similarly, it's hard to pinpoint why crypto is currently in a bull market, but there is a very likely culprit if we simply look to what powered the previous one. If we accept inflation, especially that of the sneaky, stealthy kind as the driver of Bitcoin, then we must also accept that it is possibly, in some ways, worse than it has been in the wake of the multi-trillion dollar stimulus. The link between bitcoin and inflation is quite well-documented, so we won’t discuss it in detail. What we're instead interested in its connection to gold gold. Gold has had a few weeks that have either been tedious or awesome, depending on who you ask. Yes, it has pulled back from the $2,800 level, but it remains above $2,600, a 58% increase over the $1,650 price we saw last summer. No big forecasters are shying away from their $3,000 targets for next year, and corrections like these are to be expected. Psychologically, though, some currently feel as if they don't know what exactly is going on with the metal. Those who rank among that group would do well to pay attention to bitcoin's rise, as we have seen inflationary spikes consistently push the crypto market up. If we had to throw out a guess, we'd say that crypto investors are seeing the kind of wealth erosion they don't want to be in and have been looking for refuge just as gold investors have. Going by this, we have to affirm expectations of big banks that $3,000 gold is nearly a sure thing in 2025. Just between the national debt and its inflation connection is probably enough to send gold to $3k, although the full list of tailwinds is much longer. The nice thing about all this is that, for all the comparisons, gold remains an entirely different asset from bitcoin. It's nowhere near as volatile, has a notable historical role as money, and doesn't require the kind of risk tolerance that crypto demands from its investors. Furthermore, the pullback to levels slightly above $2,600 might be just the pit stop many have been waiting for as we approach a year that might be even better for gold. And considering gold prices hit new all-time highs more than 30 times this year, 2025 could be quite the ride for gold owners. History suggests rate cuts will push silver into a price breakout What is the main thing that needs to be said about silver right now? Undoubtedly, it is that it's nowhere near as high as it should be. Simply put, the valuations don't make sense. It doesn't make sense for silver to be cheaper now than it was in the 1980s, nor does it make sense for the gold/silver ratio to be this askew. This is all the more true when we are seeing annual deficits amounting to millions of ounces, strongly pointing to some kind of reckoning in the not too distant future. It has been a waiting game in silver as everyone waits for the thing that will launch it to $50. Peter Krauth, author of The Great Silver Bull, believes the coming rate cutting cycle will be just the thing to give silver its due. See for yourself: It's not exactly correct to call it belief, as the data is there. Krauth points out that silver averages a 332% gain during rate cutting cycles, which would leave it FAR above the $50 level that everyone is kind of expecting. I did the math -- $75/oz silver is what we’re looking at, based on todays price. Krauth says that silver starts by bottoming out before leaping off, which sets us on the course of interest. What we like about that part is that silver has already sort of bottomed out. It has been going from $26 to $32 throughout gold's historic run, currently being just above $30. So where can it fall to? $28 or $26 again? Nothing significantly below that is realistic, and those are levels we are already seeing irrespective of rate cuts. That means that silver's "bottom" that starts off the gains during rate cutting cycles might have already happened. As Krauth notes, rate cutting cycles last between a year and two. Since the first cut happened in September, that means silver has nearly two years left to grow. There are many other intricacies to this story, all of them very bullish for silver. For example, when silver posted the gains that it did, annual increases in supply deficit numbering in the millions of ounces weren't the norm. Experts are now forecasting a recession in 2025 (or possibly a continuation of the recession we’ve been in since 2022), which would be bullish for silver on its own. This is happening despite plans for a presumably massive interest rate cutting cycle. The impact of the Fed's rate hiking cycle, the highest in 50 years, on inflation has been so disappointing we have actually heard repeated mentions that they might do an about-face and raise rates rather than continuing this cutting cycle... That probably won’t happen. The Fed doesn't ever admit to mistakes. Nor do they admit to their role in causing inflation in the first place. Changing direction might drop too big a hint to the public that Jerome Powell is only the latest in a line of naked emperors. If we look only at how little inflation has declined over the last few months, there’s a clear monetary reason to stop lowering interest rates… But the Fed’s power depends on the illusion of infallibility. Given the choice, they’ll accept higher inflation longer so long as there’s a convenient scapegoat. Supply chain snarls, or Vladimir Putin, or greedy corporations – or Trump tariffs? Well, economies are complex things. There’s never a shortage of places to point a trembling, outraged finger. Anyway, back to silver’s prospects. Another rate cut (95% likelihood of a Dec. 17-18 rate cut of 25bps today) followed by a wait-and-see attitude would prolong the overall cutting cycle. That would give silver so much more time to perform. Those interested in fundamentals might also want to know that Russia has “temporarily” banned exports of precious metals scrap. It seems to highlight silver much more than anything else. Remember, silver supply is complicated – only 20-30% comes from silver ore, and the rest is usually mixed up with base metals (most often copper, lead or zinc). The best way to get pure silver is through recycling! But the gold-hungry Russian government is determined to diversify its holdings with silver for the first time (along with platinum and palladium) for similar reasons they own gold: Protection, insurance and value. As exciting as things are looking for gold in the year ahead, I believe silver will be much more exciting. As Patrick Heller told his readers:
Indians are giving up their gold in unbelievable numbers I can’t get enough of India's seemingly state-run cash for gold scheme, simply because the numbers that keep coming up are that astounding. Here's a brief primer on the main points of this story, which we have labeled as one to follow some time ago:
As President Roosevelt could tell you, private gold ownership is a thorn in the side of any money-printing government. We're not going to spend too much time speculating on how much government intent there is here, but rather focus on some head-spinning hard data. India's gold loans rose by 56% year-on-year in October, a staggering amount compared to the 13% year-on-year growth in October 2023. Mind you, it was already a booming industry back then. As if this isn't enough evidence that Indians are coming under hard times, consumer durable loans in that timeframe rose by 7% and credit card outstanding loans by 17%. So the gold loans figure more than twice exceeds both other primary forms of loans. What do we know about loans? They are often taken by people in need to cover basic expenses, and are often not paid, with the bank then taking the collateral. In the case of gold loans, we can safely assume that the bulk of debtors consist of the lower to lower-middle income classes. If they miss payment, the bank keeps the gold. We all know the phrase "follow the money", but it has a special ring here. We are entering a time when gold is being re-established as money. It is the only money governments really care about, as their gold bullion purchases and careless money printing can attest. The famous pile of Indian consumer gold is being drained, and the gold is going somewhere. Is it such a stretch to believe that it is smelted and bought by the government, not unlike Russia buys its own ore? Given that India is a member of the BRICS alliance, it seems likelier than not.
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Bitcoin’s record ascent beyond $100k captured headlines worldwide. But what does this so-called digital gold have to do with the real thing? If you take a closer look, it’s plain to see that the forces driving the crypto market higher are very similar to those driving the gold market… 