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Big Investors Dump Bitcoin for Gold as Inflation Heats Up

Summary:
One of the biggest reasons why people invest in assets like gold, Bitcoin and altcoins is because they act as hedges against bad government policy. Look at Venezuela. The beleaguered country’s currency, the bolivar, isn’t worth the paper it’s printed on due to draconian socialist policies. As such, an outsized percentage of Venezuelans rely on Bitcoin as a store of value and to help make ends meet. A less severe example—though no less impactful—is Canada. In case you haven’t heard, there’s a new bill being considered, C-10, that some critics worry could lead to the Canadian government’s regulation of the content you post on YouTube, Facebook and other social media sites. Although the bill’s main advocate, Heritage Minister Steven Guilbeault, has tried to make it “crystal clear” that the

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Big Investors Dump Bitcoin for Gold as Inflation Heats Up

One of the biggest reasons why people invest in assets like gold, Bitcoin and altcoins is because they act as hedges against bad government policy.

Look at Venezuela. The beleaguered country’s currency, the bolivar, isn’t worth the paper it’s printed on due to draconian socialist policies. As such, an outsized percentage of Venezuelans rely on Bitcoin as a store of value and to help make ends meet.

A less severe example—though no less impactful—is Canada. In case you haven’t heard, there’s a new bill being considered, C-10, that some critics worry could lead to the Canadian government’s regulation of the content you post on YouTube, Facebook and other social media sites. Although the bill’s main advocate, Heritage Minister Steven Guilbeault, has tried to make it “crystal clear” that the government seeks only to oversee “professional” content creators and not everyday social media users, fears persist that people’s freedom of speech is in jeopardy.

Even Google, which owns YouTube, has voiced concerns. “We remain concerned about the unintended consequences, particularly with regards to the potential effects on Canadians’ expressive rights,” the company said in a statement.

This is precisely what members of the crypto community call FUD, or fear, uncertainty and doubt.

Normally used to refer to something or someone who tries to spread negative information about crypto (Elon Musk?), FUD also summarizes how Canadians feel about the proposed legislation.

The Bitcoin Pullback Is Normal and Healthy

Speaking of Elon Musk, investors yanked $98 million out of Bitcoin investment products last week, the most on record, after the Tesla chief announced in a tweet that he was suspending vehicle purchases using the cryptocurrency. This amount was enough to offset net inflows of $48 million into all other digital asset funds. Ether funds, for instance, attracted $27 million, bringing the crypto’s weekly trading volume to an incredible $4.1 billion, the most ever, according to CoinShares.

Big Investors Dump Bitcoin for Gold as Inflation Heats Up

Bitcoin came under pressure from more than just Musk’s distorted comments on its energy usage. The Chinese government has also cracked down on the crypto ecosystem, banning financial institutions from providing services related to digital assets. A hotline has even been set up in one Chinese province that people can use to snitch on neighbors they suspect of mining cryptos.

Of course, this is only the 10,000th time China has come out against crypto. More FUD.

The week’s selloff was dramatic. By Wednesday, Bitcoin was down more than 40% from its all-time high of $64,000, set in mid-April. The token’s market dominance fell to a three-year low of 40%.  

I believe the pullback is healthy. It’s important for investors to remember that this kind of volatility is normal for such a still-emerging, speculative asset class. It’s also important to keep things in perspective: Bitcoin is still up around 30% so far this year, close to 300% for the 12-month period.

Institutional Investors Rediscovering Gold

So where have all the millions that have flowed out of crypto funds gone to? Would you be surprised to hear gold?

According to an analysis of CME futures contract, large institutional investors could be shifting away from Bitcoin in favor of gold. “Over the past month, Bitcoin futures markets experienced their steepest and more sustained liquidation since the Bitcoin ascent started last October,” JPMorgan wrote in a recent note to investors. These liquidations have corresponded with inflows into gold ETFs.

The price of the yellow metal broke through resistance this week, touching $1,890 an ounce for the first time since January on a declining U.S. dollar. The next test is $1,900, and after that, its all-time high of $2,067.

Big Investors Dump Bitcoin for Gold as Inflation Heats Up

Whereas Bitcoin is a speculative asset, gold is a well-established, highly liquid asset with a centuries-long track record. We know what the price drivers are.

Besides responding to a weaker dollar, gold is finding traction from ongoing unprecedented money-printing and monetary stimulus. The amount of M2 money circulating the U.S. economy is up about 21% from a year ago. Meanwhile, the Federal Reserve maintains its bond-buying program. As of this week, the size of the central bank’s balance sheet was just under a staggering $8 trillion.

More Inflation Warnings

Inflation also continues to weigh on investors’ minds, improving the investment case for gold. This week we saw even more data emerge warning markets that prices could be headed higher in the near term.

For one, input prices for manufacturers in the Philadelphia region accelerated at their fastest pace in over 40 years. The Philly Fed’s prices paid diffusion index rose to 76.8 this month, the highest reading since March 1980. Three quarters of manufacturers reported price increases while none reported decreases. Expect these higher costs to be passed on to consumers.

Big Investors Dump Bitcoin for Gold as Inflation Heats Up

Much of the price increases could be related to record and near-record shipping costs. The rate to ship a 40-foot container continues to climb as demand far outpaces supply. The Drewry World Container Index rose 7% during the week ended Thursday to touch $5,193, a nearly fourfold increase from a year earlier.

Freight rates from Shanghai to Rotterdam reached a new all-time high of $9,865 per 40-foot container.

Big Investors Dump Bitcoin for Gold as Inflation Heats Up

Fuel costs have also been rising in the wake of the cyberattack on the Colonial Pipeline, which delivers 45% of gas supply to the Southeast. This week, GasBuddy predicted that gas prices would be at their most expensive this Memorial Day weekend in seven years. Gas will average $2.98 per gallon later this month, the company said, the most since 2014 when it was $3.66. This could have the effect of discouraging some fully vaccinated families from taking a well-deserved summer road trip.

American Airlines Passengers Can Now Verify Vaccination Status Using VeriFLY

While I’m on the topic of travel, this summer could mark the turnaround we’ve been hoping for in terms of commercial flight demand. As I’ve already shared with you, the European Union plans to reopen its borders to fully vaccinated visitors, and this week, American Airlines announced that it’s now allowing passengers to use the VeriFLY app to verify their vaccination status before flying. This gives customers travel access to the Bahamas, El Salvador and Guatemala. Wheels up!

Gold Market

This week, spot gold closed at $1,881.25, up $37.82 per ounce, or 2.05%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 4.02%. The S&P/TSX Venture Index came in up 2.77%. The U.S. Trade-Weighted Dollar fell 0.31%.

Date Event Survey Actual Prior
May-16 China Retail Sales YoY 25.0% 17.7% 34.2%
May-18 Housing Starts 1704k 1569k 1733k
May–19 Eurozone CPI Core YoY 0.8% 0.7% 0.8%
May-20 Initial Jobless Claims 450k 444k 478k
May-25 New Home Sales 950k 1021k
May-25 Conf. Board Consumer Confidence 119.8 121.7
May-27 Hong Kong Exports YoY 26.6% 26.4%
May-27 Durable Goods Orders 0.8% 0.8%
May-27 GDP Annualized QoQ 6.4% 6.4%
May-27 Initial Jobless Claims 425k 444k

Strengths

  • The best performing precious metal for the week was gold, up 2.05%. The metal rose to a three-month high as lower bond yields helped to improve gold prices. Continuing concerns about rising inflation are buoying the metal as well. Flows in gold ETFs are continuing to increase. Gold ETFs recorded inflows of 442,000 ounces. Net long gold positions increased by 29,000 to 204,000 contracts. In addition, according to J.P. Morgan, investors have been pulling money out of bitcoin and buying gold as a replacement. China’s gold imports tripled from the prior month. In a recent note, BMO Capital Markets indicates that gold does well in inflationary environments and producers may have record cash flow over the next year.

Big Investors Dump Bitcoin for Gold as Inflation Heats Up

  • Anglo American’s De Beers business sold $380 million of rough diamonds at its fourth auction this year. The third sale was for $450 million. Only $56 million of diamonds were sold in all of 2020. Demand from India may be down in 2021 due to the COVID surge.
  • The World Platinum Investment Council (WPIC) said the global platinum market will be more undersupplied this year than it previously thought as economic recovery fuels a surge in demand from industry. The roughly 8 million ounce a year market will see a shortfall of 158,000 ounces in 2021, the third consecutive annual deficit, the WPIC said in its latest quarterly report. Three months ago, it forecast undersupply of 60,000 ounces in 2021. Additionally, UBS increased its forecasts for platinum based on these same trends. ETF flows into platinum are up 3% this year.

Weaknesses

  • Despite the positive forecast from the WPIC, the worst performing precious metal for the week was platinum, down 4.66%. Centerra Gold said on Sunday it has initiated binding arbitration against Kyrgyzstan government after the parliament passed a law allowing the state to temporarily take over the country’s biggest industrial enterprise, the Kumtor gold mine operated by Centerra. Given these restrictions, Centerra is no longer in control of the mine. Centerra has suspended its 2021 guidance and three-year outlook relating to Kumtor. Kumtor earnings are being removed from Centerra and estimates are being reduced. Most investors who have traded Centerra in the past, based on past government interventions, seem to expect a more reasonable outcome as the share price of Centerra is up nearly 17% since the initial ownership dispute was brough to light a couple weeks ago.
  • American Gold and Silver reported disappointing first quarter results: a loss of $0.08 per share versus a consensus of $0.06 loss per share. Relief Canyon production of gold was 1,300 ounces, as opposed to an 8,200-ounce consensus. Additionally, the company took an $83 million write-down on this property. Its share price finished the week off nearly 25%.
  • St Barbara Ltd. said that it has lowered its full-year production guidance but increased its all-in sustaining costs forecast due to guidance adjustments at its Leonora and Simberi operations. The company lowered its consolidated gold production guidance to between 330,000 ounces and 360,000 ounces from the previous guidance of between 370,000 ounces and 380,000 ounces, and increased its all-in sustaining costs forecast to a range between A$1,547 per ounce and A$1,695 per ounce from the previous estimate of A$1,440 per ounce to A$1,520 per ounce.

Opportunities

  • Arizona Metals reported the discovery of a new high-grade gold and zinc zone at its 100% owned Kay Mine property in Arizona. In a sure sign of the project’s potential to add significant tonnage, potentially at improved grades, most of the mineralized intervals in the drilled holes are in an area that has historically seen very little exploration. Arizona Metals is funded for 75,000 meters of drilling to infill and expand the resource footprint.
  • Platinum may be increasingly used instead of more expensive palladium in vehicles, according to Johnson Matthey. Platinum is about half the price of palladium. Chinese automakers appear to be taking the lead with this shift. Platinum supply will fall short of demand again this year, the World Platinum Investment Council said in a report. The market may have a shortage of 158,000 ounces.
  • Diamond inventories have dropped to cycle low levels, which creates a positive environment for pricing towards the end of this year. Easing Covid restrictions in the U.S. and Europe may release pent-up demand from weddings, which may drive strong jewelry demand in the second half of the year.

Threats

  • Rising labor costs may begin to occur at many mines. This is most acute in Australia and Brazil, according to the CEOs of Newmont and AngloGold Ashanti.  In addition, South Africa’s Union of Mineworkers has asked for a 15% annual wage increase through 2023. Citi’s Economic Surprise Index, which measures whether economic data is missing or beating expectations, is now at its lowest level in a year. This implies that the strength of the economy is no longer running above expectations. Any new economic misses might surprise the market on “Where’s the post-pandemic growth?”
  • When China’s Zijin Mining paid $1 billion to buy an extensive gold mine in the Colombian Andes in late 2019, security risks were a top concern, despite an operation by the military which had beat back illegal miners. Illegal extraction by wildcat miners in tunnels either within or adjoining its concession has increased. The tunnels are controlled by the Clan del Golfo crime gang, known locally as “The Ten” for the 10% cut they take off the illegal miner’s output. 
  • UBS initiated coverage of platinum miners with a neutral stance, as they see supply demand imbalances easing in the next two years on supply increases from South Africa and Russia. The bank sees prices for palladium easing to $2,000 in the longer term. UBS analysts have kept their yearend forecast for gold at $1,600 an ounce, saying they “expect fading inflation surprises, higher U.S. government bond yields, rising vaccination pace to reduce uncertainty and the U.S. dollar to peak.” Consumers certainly feel inflation now as rents for single-family homes in the U.S. have risen to their highest level since 2006, with a 4.3% jump from the prior year.

 

Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average lost 0.51%. The S&P 500 Stock Index lost 0.43%, while the Nasdaq Composite climbed 0.31%. The Russell 2000 small capitalization index lost 0.42% this week.
  • The Hang Seng Composite rose 2.59% this week; while Taiwan was up 3.00% and the KOSPI rose 0.10%.
  • The 10-year Treasury bond yield remained flat at 1.624%.

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Polygon, rising 10.48%.
  • The National Bank of Egypt (NBE) will use Ripple’s blockchain technology, RippleNet, to create a remittance corridor with the United Arab Emirates (UAE). Ripple reported that the NBE will partner with Abu Dhabi-based LuLu International Exchange in the UAE to serve the large number of Egyptians working there. Citing World Bank Group’s report, Ripple said that the remittances to Egypt in 2020 reached $24 billion. By joining RippleNet, NBE and LuLu get access to cheaper, quicker, and reliable payments. 
  • Figure Technologies, a California-based blockchain lending startup, completed its Series D funding round, announcing that it raised $200 million at a valuation of $3.2 billion. Figure’s Provenance blockchain acts as a marketplace for loans and mortgages, capital table and fund management, and banking and payments. The fintech startup has also applied for a U.S. banking charter, which is currently under review at the Office of the Comptroller of the Currency (OCC).

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performer for the week was Shiba Inu, down 54.34%.
  • The Federal Trade Commission (FTC) issued a consumer protection warning regarding the increased volume of cryptocurrency scams during the current bull run. The report claims that since October 2020, around 7,000 people have reported losses of more than $80 million on such scams, with the median loss of almost $1,900. The FTC added that these losses have risen 1,000% year-over-year, with reports of people sending more than $2 million in cryptocurrencies to Elon Musk impersonators over the past six months. The scams range from fake promises of increasing someone’s investment if they send crypto to the scammer’s wallet to scammers using online dating sites to catfish people and present false cryptocurrency investment opportunities.
  • Bitcoin, Ether, and other altcoins saw massive selloffs this week as the total cryptocurrency market capitalization dropped by more than $1 trillion from last week’s all-time high of $2.5 trillion. During the week, Bitcoin dropped by 26.87% while Ether’s price slumped by more than 40%. The chart below shows that even with the current price drop, both Bitcoin and Ether have provided significant returns to their investors.

Big Investors Dump Bitcoin for Gold as Inflation Heats Up

Opportunities

  • Commerzbank, which is Germany’s second biggest bank, announced that it partnered with chemical firms Evonik and BASF SE to test the use of its blockchain technology and programmable money in a bid to manage supply chains between the two companies. The bank reported that transactions were done in an automated and digital manner, using programmable digital euros on Commerzbank’s blockchain platform. Commerzbank was able to generate a thorough and tamper-proof depiction of business processes after receiving data from the two chemical companies, with smart contracts validating the transactions. As a result of the successful pilot, Evonik and BASF SE have agreed to expand the testing to other supply chain partners.
  • Vermont-based Teucrium Trading filed an application with the U.S. Securities and Exchange Commission (SEC) to list a bitcoin futures exchange-traded fund (ETF). Teucrium Trading, which also has agriculture-related ETFs, plans to list the Teucrium Bitcoin Futures Fund (BCFU) on the NYSE Arca, and it would track a benchmark of Bitcoin futures contracts. Although the SEC has not approved any bitcoin-related ETFs yet, Teucrium believes that its fund’s objective to track the largest cryptocurrency’s futures market might have an advantage over other applications that propose ETFs that are physically backed by Bitcoin.     
  • The Nebraska state legislature voted to pass a bill which proposed creating a new state bank charter for digital asset depository institutions, providing consumers and institutions places to custody their digital assets. Additionally, the bill will allow existing state-chartered banks in the state to open crypto banking divisions. The digital asset banks in Nebraska will not accept deposits or lend in fiat currencies and will be required to hold 100% of its assets in reserves.

Threats

  • The Chairman of the Senate Banking Committee, Senator Sherrod Brown, sent an open letter to the Acting Comptroller at the Office of the Comptroller of the Currency (OCC) regarding concerns about the OCC granting national trust charters to cryptocurrency companies. In the past five months, the OCC has granted conditional trust charters to Anchorage, Paxos and Protego, and Sen. Brown requested that Michael Hsu, the Acting Comptroller, should reassess the grants. The letter also said that it was unclear whether the OCC had conducted thorough due diligence before approving the three conditional charters. Sen. Brown pointed out in the letter that the OCC is not capable of regulating these entities as traditional banks due to the volatility of digital asset valuations and the disproportionate influence that individuals have on entire cryptocurrency markets.
  • The Iranian government has enlisted the nation’s Ministry of Intelligence in a bid to crack down on illegal crypto miners operating within its borders. The Ministry is said to be involved in setting up committees and task forces to locate and seize mining farms that operate without a license. Iran’s power grid has been put under considerable strain as the Middle Eastern nation used crypto mining to boost its sanction-hit economy, and the strain has only exacerbated this year due to reduced rainfall, limiting supply of hydroelectricity. Crypto miners in Iran account for 3.82% of Bitcoin’s total hash rate.
  • Hong Kong’s Financial Services and the Treasury Bureau (FSTB) released a report this week calling for a thorough licensing regime for cryptocurrency exchanges while limiting trading only to qualified investors, which refers to individuals with portfolios worth more than $1 million as per Hong Kong law. If the legislators pass a law based on FSTB’s recommendations, up to 93% of Hong Kong’s population would be denied access to cryptocurrencies. Additionally, the city’s government is planning to allow its Securities and Futures Commission (SFC) to withdraw licenses of already authorized crypto exchanges at will.

Big Investors Dump Bitcoin for Gold as Inflation Heats Up

You can read the remainder of the article at https://www.usfunds.com/investor-library/investor-alert/big-investors-dump-bitcoin-for-gold-as-inflation-heats-up/

May 21, 2021

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

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