Investing Pioneer – 11:01 PM EST – 12/8/2022
Cryptocurrencies – digital currencies meant to be an alternative to currencies decreed by governments or central planners – have experienced some of the highest concentration of speculative rallies and crashes in the past decade, mostly since 2016 or so.
For speculative rallies in financial markets to occur on such a grand scale, certain preconditions must be in place. Mainly, an excess of credit. Meaning, it is plentiful and cheap to acquire. The gold rush of 1840s California brought on such rallies in the local economy due to an increased supply of gold.
In modern times, it is a downstream effect of banking behavior, originating at the Federal Reserve. As credit operates in cycles, the bull market must eventually come to an end. In late January of 2022, the Chairman of the Federal Reserve of the United States, Jerome Powell (appointed November 2, 2017) announced the potential beginning of the end, with discussions of a cessation of QE (credit expansion) and a plan to hike rates (more expensive money, thus “cooling” the currency and hence the economy).
When liquidity cools, the economy constricts like a person’s circulatory system would when faced with chilling temperatures; traveling to vital organs. Are crypto-currencies vital organs? If the economy thought they were the new reserve currency, sure. But, that is not the case. Hence, expect a continued cold winter for crypto.
Going forward, non-productive assets (assets that do not generate cash flow) may not go out of style. Indeed, Bitcoin and other cryptocurrencies are largely non-productive, hence Buffett’s distaste for them. This does not mean there are no periods where non-productive assets outperform. We have seen that with Bitcoin over the last decade+.
The traditional non-productive safe-haven – gold – is probably better positioned to outperform in a risk-off, highly inflationary environment (for USD and associated/similar currencies) with debt load concerns (that is, solvency concerns associated with the cost of servicing debt).
A question arises when discussing crypto and gold in tandem. Could there be a marked interplay going forward? Maybe. Crypto may have acted as a lightning rod for capital. Both the precious metals and crypto crowd share a common general theme: a distaste or distrust against fiat currency and traditional banking. That’s not to say much of the involvement wasn’t simply people chasing ever-higher prices, without an underlying financial thesis. T
his contrasts with the Wall Street Silver crowd on Reddit, who by and large are very much based on a strong narrative of central bank distrust, etc. When crypto finally experiences a depression, it may further a shift in investor focus to precious metals.
Though a collapse in crypto-currencies would lead to great wealth destruction, meaning a great transference of capital to other assets at par value will not be possible, other capital reserves or future earnings of prospective investors can be allocated to precious metals. The price of gold and silver will likely be beneficiaries in this shift of investor focus.
Hence, it very well may be that a future wave in demand for precious metals is in part bolstered by the crash of crypto.
