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Bitcoin Is “Right Where Oil Was in 1890”

Summary:
This week I was honored to participate in the first virtual Consensus cryptocurrency conference, hosted by CoinDesk. In years past, the annual gathering—attended by the world’s biggest crypto and blockchain companies, experts, entrepreneurs and investors—has been held in New York, but in an effort to curb the spread of the coronavirus, everything was moved online. I was impressed with CoinDesk’s ability to adapt to unforeseen circumstances, and I want to thank them for the opportunity to participate. No doubt many were disappointed to lose the in-person Consensus experience this year, but I believe it may have turned out for the better. Attendees were able to listen in to every panel and seminar for free, and from the safety of their own homes. This potentially allowed speakers’ thoughts

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This week I was honored to participate in the first virtual Consensus cryptocurrency conference, hosted by CoinDesk. In years past, the annual gathering—attended by the world’s biggest crypto and blockchain companies, experts, entrepreneurs and investors—has been held in New York, but in an effort to curb the spread of the coronavirus, everything was moved online.

I was impressed with CoinDesk’s ability to adapt to unforeseen circumstances, and I want to thank them for the opportunity to participate.

No doubt many were disappointed to lose the in-person Consensus experience this year, but I believe it may have turned out for the better. Attendees were able to listen in to every panel and seminar for free, and from the safety of their own homes. This potentially allowed speakers’ thoughts and ideas to reach even more crypto investors than it otherwise would have. You can watch the replay by clicking here.

Paul Tudor Jones Adds Bitcoin to His Portfolio

One of this week’s biggest reveals from last week is that billionaire hedge fund manager Paul Tudor Jones became among the first institutional investors to take a stake in bitcoin, the largest digital currency by market cap, as a hedge against inflation sparked by massive money-printing.

Jones told clients that bitcoin reminds him of gold in the late 1970s when consumers prices began to go off the rails. Adjusted for inflation, the price of gold actually peaked not in 2011, but in 1980.

“The best profit-maximizing strategy is to own the fastest horse,” Jones wrote. “If I am forced to forecast, my best is it will be bitcoin.”

The 65-year-old money manager remains a fan of gold, by the way, predicting the metal could rally to $2,400 an ounce and possibly $6,700 “if we went back to the 1980 extremes.”  

Third Bitcoin Halving Occurred This Week

Another big topic of discussion was the bitcoin halving that took place on Monday. This is only the third such halving in bitcoin’s 11-year history, the first occurring in November 2012, the second in July 2016.

In case you’re unfamiliar with the term, a “halving” is an artificial, preprogrammed means to control the supply of bitcoin. It “pumps the brakes” on the issuance and circulation of new units of the cryptocurrency.

Before the halving, crypto miners were rewarded with 12.5 bitcoin every time their powerful network of computers solved a complex math problem. Today, though, that reward has been cut in half to 6.25 bitcoin.

The next halving will limit the reward to only 3.125 bitcoin, and so on, until all 21 million bitcoin are mined. As of Thursday, about 18.4 million bitcoin were in circulation, according to Blockchain.com, meaning there’s only 2.6 million remaining up for grabs.

Act Fast, Supply Is Limited!

So what happens now? To answer that, I think it’s helpful to remember that bitcoin is like any other asset, in that it responds to the dynamics of supply and demand.

West Texas Intermediate (WTI) crude hit $140 per barrel in June 2008 when it was believed that oil exploration had peaked. But the U.S. fracking industry changed the game, allowing crude to be extracted from areas that were previously unattainable. Global oil prices collapsed in 2014 as U.S. production ramped up, and today WTI is trading just under $30 per barrel, about 80 percent off its record high.

Gold prices, as I’ve explained before, have benefited from the fact that we’re close to exhausting the world’s gold deposits, or at least those that can be feasibly developed using current mining technology. Short of a breakthrough in a similar “fracking” process, producers are looking at increasingly less reward in mineral output for the time, money and effort that they spend digging the metal out of the ground.

Sound familiar? It should, because bitcoin prices have followed the same trajectory.   

In the months following the first and second halvings, bitcoin prices surged as it became abundantly clear that at some point in the near future, new bitcoin issuances will come to a halt. Time will tell if the same will happen this time, but I’m very bullish.

Bitcoin Is “Right Where Oil Was in 1890”

Just Like Oil in 1890?

That’s just the supply side. What about the demand side? If few to no people have any use for or interest in an asset, then it doesn’t have much value.

Conversely, the more people that use something, the greater its value has generally become. In economics, this is what’s known as Metcalfe’s Law. Consider oil in the 19th century. Humans had been aware of and indeed using raw petroleum for centuries, but it wasn’t until the advent of the automobile that the scramble for “black gold” really began, making some early oil barons like John D. Rockefeller incredibly wealthy.

Again, bitcoin—and cryptocurrency as a whole—is no different. It’s a nascent industry, but we’re seeing more and more users are finding their way into digital currencies, which raises the total value. According to Blockchain.com data, just under 50 million unique crypto wallets have been created as of May 2020, a change of 10 million from just a year earlier.

Bitcoin Is “Right Where Oil Was in 1890”

“We’re right where oil was in 1890,” commented Alex Leigl, CEO of Layer1, during our panel discussion on Monday.

The analogy is a compelling one. It suggests not only that we’re at the forefront of something new and bold, but that there could be many years of maturation and innovation ahead of us.

What an exciting time to be an investor!

Gold Market

This week spot gold closed at $1,743.67, up $40.97 per ounce, or 2.41 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 4.37 percent. The S&P/TSX Venture Index came in up 3.39 percent. The U.S. Trade-Weighted Dollar rose 0.65 percent.

Date Event Survey Actual Prior
May-12 CPI YoY 0.4% 0.3% 1.5%
May-13 PPI Final Demand YoY -0.4% -1.2% 0.7%
May-14 Germany CPI YoY 0.8% 0.9% 0.8%
May-14 Initial Jobless Claims 2500k 2981k 3176k
May-14 China Retail Sales -6.0% -7.5% -15.8%
May-19 Germany ZEW Survey Expectations 32.0 28.2
May-19 Germany ZEW Current Situation -88.6 -91.5
May-19 Housing Starts 929k 1216k
May-20 Eurozone CPI Core YoY 0.9% 0.9%
May-21 Initial Jobless Claims 2400k 2981k

Strengths

  • The best performing precious metal was silver, up 7.30 percent. Gold had a strong week and held above $1,700 an ounce. Bullion rose the most in a week on Wednesday after Fed Chairman Jerome Powell said that the U.S. economy is facing unprecedented downside risks that could do lasting damage. Powell pushed legislators to take more action to support the economy. The possibility of negative interest rates and continued near-zero rates is supportive for the yellow metal. By the end of the week bullion was holding near $1,750 an ounce. Goldman Sachs’ global head of commodities Jeffrey Currie said in a Bloomberg TV interview this week that gold is his favorite commodity trade right now. “There are a lot of reasons to still hold gold. Foremost is that you are still seeing the debasement effects of all the stimulus measures.”

Bitcoin Is “Right Where Oil Was in 1890”

  • Everyone knows the FANG stocks – Facebook, Amazon, Netflix and Google. But do they also know the BANG stocks – Barrick Gold, Agnico Eagle, Newmont and Goldcorp. Axios notes that these big gold miners have dwarfed the returns of the major tech companies. Since early May 2018, BANG stocks have nearly tripled the gain of FANG stocks, reports Jesse Felder of the Felder Report.
  • The World Gold Council (WGC) expects the number of central banks buying gold to increase substantially in 2020. Bloomberg reports that based on the recent WGC survey, 20 percent of central banks intend to boost gold reserves over the next 12 months. This is up from just 8 percent of respondents in a 2019 poll. 22 central banks were net buyers of gold in 2019, up from only 8 in 2010.

Weaknesses

  • The worst performing precious metal was palladium, down 0.54 percent. Norilsk Nickel, the world’s biggest palladium producer, said in a report this week that it expects consumption of the metal to fall 16 percent in 2020. Palladium prices have fallen by a third since hitting a record high in late February. The coronavirus crisis prompted automakers to curb output and the metal’s rise was in large part due to increased use in autocatalysts.
  • First Majestic announced that it temporarily postponed the sale of 292,000 ounces of silver and 700 ounces of gold worth $5.3 million at the end of the first quarter, reports Bloomberg. The company will carry over inventory to next quarter in hopes that prices will improve. “We temporarily suspended our silver and gold sales as paper prices dropped significantly below true physical prices,” said CEO Keith Neumeyer.
  • S&P Global Market Intelligence wrote in a report that during the past three years there were no major new gold discoveries and in the past decade there were only 25. Kevin Murphy wrote in the report “while there are still plenty of gold assets to be developed, the lack of new major deposits being discovered means that the project pipeline is increasingly short of large, high-quality assets needed to replace aging major gold mines.” Kitco News notes that a major factor in the decline of discoveries is the drastic drop in exploration budgets over the last decade. On the other hand, tighter gold supply could further support higher metal prices and exploration stocks will be bid up in price as they hold the keys to many of our future mines.

Opportunities

  • Based on the GTI VERA Convergence Divergence Indicator, which detects trend exhaustion, silver just triggered a buy signal. Bloomberg reports that silver had far underperformed gold and was recently trading at its lowest relative to the yellow metal. However, as economies restart there is growing support for silver’s industrial demand component, according to George Gero, managing director at RBC Wealth Management.
  • On Monday, SSR Mining and Alacer Gold Corp announced an at-market merger of equals. The new entity will continue as SSR Mining and will be headquartered in Denver. The new board will be comprised of five directors from each of the current companies’ boards. Paul Benson, President and CEO will step down from SSR Mining and Rod Antal, the current President and CEO of Alacer Gold will be the new leader at SSR Mining. Rod is highly respected for his track record at Alacer and kudos to SSR Mining for preparing for the future versus practicing a protect entrenched management strategy. Despite logistical problems the pandemic has created, M&A is still growing in the gold sector, while broader M&A across the globe has slumped.
  • AngloGold announced that it will continue its dividend payments as higher metal prices have boosted the miner’s cash levels. CEO Kelvin Dushinsky said in a conference call that gold prices could rise to higher than $2,000 an ounce. Sibanye Stillwater said it has sufficient cash to weather to coronavirus pandemic after record earnings helped the mine meet its debt target, reports Bloomberg. The South African miner had a strong first quarter due to higher metal prices. CEO Neal Froneman said in a statement that “the group is in a solid financial position.”

Threats

  • Although the surge in unemployment and weak economic data is a positive driver for gold, it is still a negative overall. On Thursday the Labor Department reported that 2.98 million Americans filed for weekly unemployment benefits – the fourth straight week of above expected numbers. 36 million American workers have now lost their jobs in just two months. U.S. retail sales fell 16.4 percent in April, following the March decline of 8.3 percent. In a Reuters poll of economists, U.S. GDP is forecast to shrink 35 percent in the second quarter after contracting by 4.8 percent last quarter.
  • Billionaire investor Stanley Druckenmiller questions the optimism of a strong “V-shaped” recovery for the global economy. Although equity markets have seen a sharp recovery since bottoming out in March when the world just began to feel the economic impact of the coronavirus, there is doubt it will last, reports Kitco News. Druckenmiller said on a webcast this week that “the risk-reward for equity is maybe as bad as I’ve seen it in my career.”
  • The U.S.-China tensions ramped back up this week. In a Fox news interview on Thursday, President Trump said that he was disappointed with China’s failure to contain the coronavirus and said he does not want to speak with President Xi Jinping right now. President Trump even threatened to cut off the relationship entirely: “We could do things. We could cut off the whole relationship.”  Undoubtingly, this is a bargaining ploy to gain leverage over China, but the wildcard is the uncertainty this introduces in the meantime, which may lower investor confidence.

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 2.65 percent. The S&P 500 Stock Index fell 2.38 percent, while the Nasdaq Composite fell 1.17 percent. The Russell 2000 small capitalization index lost 5.58 percent this week.
  • The Hang Seng Composite lost 0.87 percent this week; while Taiwan was down 0.79 percent and the KOSPI fell 0.95 percent.
  • The 10-year Treasury bond yield fell 4 basis points to 0.64 percent.

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

You can read the remainder of the article at http://www.usfunds.com/investor-library/investor-alert/bitcoin-is-right-where-oil-was-in-1890/

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