Technical Tuesday - Why Gold is the New Bitcoin
Hello and Happy (almost) Thanksgiving.
If I had a dollar for every time someone told me Bitcoin is the new Gold, I'd have the equivalent of 20 million pesos.
When the price of Bitcoin jolted higher as inflation was on the rise, many analysts called it a bona fide hedge against inflation.
But where are those analysts now as inflation continues to charge upward and Bitcoin continues to fall?
(Click any image to enlarge)
There are many influences that affect the price of cryptocurrency and if you've been conscious for the last couple of weeks, you've heard about the collapse of the fifth largest crypto exchange, FTX. That event is causing a panic among greener crypto investors. And let's face it, most crypto investors are green.
This is causing a "run on the bank" scenario where folks who don't keep their crypto in a digital wallet and instead keep it in places like Binance or Coinbase, are pulling money out of crypto currency exchanges rapidly.
The stock of Coinbase (COIN) is clearly experiencing difficulties of its own as a result.
But one unloved "store of value" that recently decided to poke its head back up in a big way is the good ol' fashion yellow metal itself -- Gold!
One chart (Bitcoin/BTC) has nothing to do with the other (Gold/GLD) and in fact, Bitcoin's price doesn't seem to have anything to do with inflation at all, in hindsight. But there are two forces that seem to be pushing the price of gold higher.
- As more money leaves the cryptocurrency market, while needing a place to go that isn't a fiat currency like the U.S. Dollar, good ol' fashion gold seems to be the preferred safe haven. After all, you can't keep Bitcoin under your mattress. Or maybe you can keep a thumb drive under the mattress as long as it doesn't get wet!
- A much larger force, and source of buying pressure that's resurfaced lately is talk of foreign countries' aiming to dethrone the U.S. dollar as the primary reserve currency of the world. China and Russia may be working toward a new currency that's backed by Gold and other metals.And China began buying up huge quantities of gold at the same time that Russia was forced off the dollar due to sanctions imposed in response to its invasion of Ukraine.
I understand that this idea may be alarming to people in the United States. Relations with China haven't exactly been warm and fuzzy. And as for Russia... well... you know.
There's an awful lot of people, money and resources (that is, power) in both countries. I won't even get into the fact that Taiwan, by far the largest producer of semiconductors (the brains of technology), seems to be caught in a spider's web, waiting until the China spider feels ready to devour it. Talk about potential for world domination.
Now, this is not a new story. I started writing about global central banks' buying up record amounts of gold about a decade ago. Until about 2010, global central banks had been net sellers of gold, but then they started buying. This in turn led to discussions about how more and more global trade was happening in other currencies outside of the greenback.
But take a look at the blue shaded part of the 2022 bar, below, which represents Q3 gold buying done by central banks.
According to Reuters, Swiss gold exports to China hit a 5-year high, Beijing received 80.1 tons of gold ($4.6 billion value), in the month of July, the second-highest monthly total since 2012.
This article is not about China and Russia's attempt to operate in their own global currency, or about the many big reasons that their plan isn't even close to reality at this time.
I'm here to talk about how to profit from the huge gold demand, and for how long you'll be able to do so.
Here's a sneak peek at my Sector Relative Strength Matrix.
You can see that the Precious Metals sector (PREC) is ranked #2. The sector has been near the top of the rankings since that massive Q3 buying seen in the previous table.
Here's a look at the ranking history of this particular sector:
Whether you're looking to own a strong sector (the #2 out of the 45 sectors we track) or just looking for a great way to hedge inflation, one ETF is a great way to do so. It represents a diversified basket of stocks in large gold companies.
To play the strong upside moves that we're likely to see in the sector in the coming 6-9 months, I like the VanEck Gold Miners ETF (GDX).
FULL DISCLOSURE: In my separately-owned money management firm, I have a bearish short-term position in GDX (the position benefits from a price decline. But I am actually bullish on the ETF at this point. I took the position as part of a hedge of a model with over a dozen positions, and I'm kicking myself for not exiting yesterday.
This sector is one of the strongest sub-sectors on the market and it has motivated global central banks to work in concert to push the price of gold and therefore in most cases, gold stocks, higher. I do like a bunch of individual stocks within the trust, but I'm going to save them for subscribers to my paid services.
I recently mentioned that one of my favorite sectors was the Oil Service sector (in addition to Oil & Coal). This was the strongest area of the stock market as of Thursday, November 10th, when I presented the same sector ranking system to many of my followers.
But at that point, the full midterm election results had not yet been determined. The point was to identify which sector would move into favor and remain in favor for the next couple of years, based on which sector saw the most buying pressure.
So the Oil Service sector's #1 ranking on Thursday November 10th was premature (which I made abundantly clear at the time of the presentation).
Commodities in general continue to remain strong, and Oil Service as well as Oil & Coal are two sectors that recently experienced a pullback in their price strength.
I discussed this with our Editor-in-Chief, Bill Spencer and our resident options trading expert and educator, Costas Bocelli, this morning on our weekly call.
A video of that call is posted on my YouTube page: @chrisrowetrader and you can watch it for yourself here.
Don't forget to subscribe to the YouTube channel!
Until next week, have a wonderful Thanksgiving!
"You see it in the price before you see it in the news."