If you have been following the coverage of Bitcoin this week, you have seen a frenzy level come about. The reality is that someone is trying to tell you that the value of a virtual buck may be worth more than a buck. While we are concerned that we have seen this before and that Bitcoin has zero barriers to entry from rivals, there is something else to consider. If the public is really willing to drive up a pool of virtual currency units because they may not trust central banks and printed currency, what does this tell you about the intrinsic value of gold and silver, without trying to make any short-term directional call?
Gold recently was called a short-sell by the strategists at Goldman Sachs. We would ask how much the firm’s position in gold changed ahead of that call. Traders were even saying last week that something fishy was happening in the gold market. And now the exodus of investors and speculators moving out of SPDR Gold Shares (NYSEMKT: GLD) is acting to drive the price of gold lower too. As a reminder, we have said over and over that if the SPDR Gold Shares was a country it would be one of the world’s top holders of gold, as it has 1,181.4 tonnes and still has a value of $59.43 billion.
Silver is often called the devil’s metal, and some even call it the poor man’s gold trade. The iShares Silver Trust (NYSEMKT: SLV) has seen waves of selling too. Still, its assets are $9.3 billion. Silver usually follows gold trends, and sometimes on a very exaggerated basis. Hence the name the devil’s metal.
Back to Bitcoin. The run-up was driven in part by the woes of Europe, but apparently thousands of traders were opening trading and merchant accounts and this caused the system to not work. The top Bitcoin exchange, called Mt. Gox, halted trading after shares rose sharply and then came crashing down again. Remember one thing, we are talking about a virtual currency here that has no central bank. It is just a peer-to-peer network of buyers and sellers of a virtual currency.
If investors and speculators are willing to drive up a virtual currency, does this not offer validity to the real value of gold and silver? Sure, gold and silver cannot exactly be sent around cyberspace all over the planet anonymously. But the government cannot just print more gold and silver. What would stop more Bitcoin currency units from being created in the future if demand remains high?
If you have been around since the Internet first started to go mainstream (or before), then the notion of a virtual currency is nothing new. All efforts so far have flopped, with the exception of PayPal, under eBay Inc. (NASDAQ: EBAY). It already has been pondered that Amazon.com Inc. (NASDAQ: AMZN) could use its new virtual currency to rival Bitcoin. The long and short is that there are just zero barriers to entry here. Another issue is what happens when cyberthieves take a Bitcoin unit. How does one get back their anonymous currency?
The current craze reminds me of the lessons of DigiCash from the 1990s that was supposed to be an anonymous virtual currency. I actually wanted that effort to work, but it was ahead of its time and there were too many concerns and technical limitations keeping it from succeeding. Then there was eCash. Now there are at least a dozen offshoots. The world of micropayments was supposed to take off 10 years ago, and Peppercoin was supposed to be a leader there. Now that domain is an insurance website, and you hardly ever hear about micropayments now. So, what is the real long-term value of a buck, virtual or real? If history doesn’t somehow change, a buck is probably worth a buck.
Do not take this to be an implied defense of the price of gold or silver on a trading trend. Just look at gold and silver prices on Friday with gold breaking $1500 and over this past week. A rising dollar is at work here, and we have even seen a challenge to dollar-yen parity. This is serious business. If the dollar keeps rising, no defense of gold and commodities is needed because the currency markets are the largest markets in the world. They are so fast that they will dominate comments and defensive posturing of any jackass like me or others out there.
Who knows where gold and silver will settle. If the trend remains, the answer is simply “lower.” Still, if people are willing to bid up and bid down a virtual currency, what does it mean for the real value of hard assets that central banks and investors still want to hold as an alternative to overly printed paper currency down the road?
Someone once named silver the devil’s metal and we love that name. The craze in Bitcoin is likely to end leaving the name for Bitcoin as ”the sucker’s currency.”
Imagine if Bitcoin does somehow get to make it and the value of a buck is no longer a buck. Someone will have to create a Bitcoin ETF that trades on a real stock exchange.