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Bitcoin up, gold sideways as Donald Trump rips up old certainties in the Middle East

Alternatives to the dollar are behaving in different ways in response to different stimuli
Will the current Presidency be the one in which the dollar's power is finally broken?

Gold bugs have had plenty to ponder during the past seven days.

For one thing, political risk returned to the fore as Donald Trump set the wheels in motion for the official recognition of Jerusalem as the capital of Israel. That’s not gone down well with the Palestinians, with the European Union, with the Brits, the French, or the Saudis. And with that list no-one’s even bothered to ask the Russians what they think.

Even so, the prospect of the US adding kindling to the Middle East conflagration, as if any more were needed, had a muted effect on the gold price. Instead, the tradeable asset that caught the most attention was Bitcoin, which went through new high after new high as the week went on, jumping through US$19,000 at one point.

You can count the days since the price was a mere US$10,000, and even at that level those who’d got in early enough were already sitting on gains of several orders of magnitude.

Does this mean that Bitcoin will replace gold as the go-to asset in times of political risk? Not yet, at any rate. At the moment it’s too small and too untrusted really to be considered as a new safe-haven asset. If gold is not much liked in sophisticated financial circles, bitcoin is despised, and on slow days any analyst worth his salt knows that decrying the rise of bitcoin as a bubble will fill space in his morning note.

There are, though, certain issues that Bitcoin does bring to the fore. One is that if Bitcoin is the fiat currency par excellence, no other currency in the world is backed by anything either these days, other than vague, unquantifiable links ongoing activity in various major economies. Analysts may think they have these pegged, but anyone who’s been through a major crisis knows that analyst assumptions go out the window at the first sign of real trouble.

What will happen in the next financial crisis? (And there will be one.) Gold will likely retain its intrinsic value, as it always has done. But Bitcoin may really come into its own too. It’s not that Bitcoin really has anything of its own to offer, but rather that thus far it appears to be free of government regulation. It can neither be devalued, nor manipulated  in other ways by Central Banks, and indeed a tradeable currency that’s beyond the control of central banks may actually herald a waning of the influence of Central Banks altogether.

After all, in a globalised economy, it doesn’t make sense for certain national central banks to be more influential than others.

At the moment, it’s still true that in some ways Janet Yellen, the incumbent chair of the Fed, is more influential than the new President of Zimbabwe, given her control over the comings and goings of the US dollar, Zimbabwe’s de facto currency.

But the time will come when a country that spirals into economic chaos like Zimbabwe did will no longer look solely to the US dollar for economic stability. Instead, all the electronic crypto-currencies will step into fill the gap. Indeed, one wonders whether Zimbabwe will ever get its own currency ever again. Will there be a need for it?

For the time being though, the dollar is still king. It’s king in Zimbabwe, it’s king in the way commodities are priced, and it’s king in the way cryptos are priced.

That’s evident enough from the way gold has traded against the dollar over the past week or so. Risk is up, but gold is down in dollar terms, because rate rises are still on. The reason for that is that US job numbers are good.

So, for those trading in gold the analyst’s pegging of the dollar to the US economy remains a viable way of pricing assets, even if ultimately unquantifiable.

How long it remains so is an open question.




© mining Capital 2018

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