Captain's Log 002:
December 3, 2020: These are very choppy waters, I've never seen such violent troughs and explosive peaks before. Each day brings its own set of challenges for many people, but today, the gold market was very strange.
Strange, meaning quiet and way too calm considering the circumstances we find ourselves in today. Gold has been a relatively-stable store-of-value over the last several millennia, along with silver, which has acted a lot like a volatile little brother to the big man on campus, gold.
I have a very mixed perspective on gold. It serves as wealth insurance, but very little else in today's world, to your average Joe tuning in. Gold was once commonly worn as jewelry in the US, but, in case you hadn't noticed, few Americans had any money before this year, to go buy thousands of dollars worth of gold jewelry as had once been the societal norm. With the Great Recession beginning in 2007, millions of middle-class Americans lost their jobs, and with them, their livelihoods. Continuing the trend of outsourcing all labor to Southeast Asia, Central America, and China, Congress drove a stake into the very foundation of what made the United States the most successful post-war economies in the world.
People have forgotten history, and therefore, will be doomed to repeat it. It was only in 1933 that FDR unilaterally seized all physical gold kept in safety deposit boxes in American banks, through his Executive Order 6102. From 1933 until 1971, it was "illegal" for an American citizen to hold physical gold. Why? Because anyone holding gold throughout the rampant and sinister devaluation of the US Petrodollar (comparable to 2020, of course), is insulated against much of the downside. Gold has acted like a hedge for that exact reason, because, originally, the US Dollar was backed by gold in an exact exchange rate that was globally honored.
My how the times have changed. Gold almost sounds like a bad word, if you read a newspaper today. I couldn't believe that there were Americans who were born after 1971 and genuinely believed that the petrodollar was backed by gold. As if. That may have prevented (or at the very least, delayed) some of the hyperinflation that we have witnessed globally. Since every single commodity traded in the world is priced in US Dollars, every single country on the planet that wants to obtain any commodities, must first use their local native fiat currency and exchange it for US Dollars, which are then used to pay the merchant selling the product. If that sounds impractical, inefficient, and illogical in today's always-connected world, it's because it is. The entire system is designed to consistently prop up demand for US Dollars, no matter what happens, countries and companies will always need commodities. It isn't as if you can snap your fingers, and magically, you no longer need copper for anything. Copper is the backbone of the Chinese manufacturing economy. Without copper, we would be in very serious economic danger of total system collapse.
I have been a fan of buying gold as wealth insurance for several years now. I only recently began taking notice of what Bitcoin has been up to, after I watched the bubbles in DeFi protocols blow up and then deflate like clockwork, before rising to their current approximate Total Locked Value of ~$14.5B USD. Bitcoin is a very different animal than gold. I used to be pretty bearish on Bitcoin, until the curtain was pulled back earlier this year on the actions that fiat banks have been taking in regards to controlling the price of commodities, especially gold and silver.
Through a globally-executed scheme, entities like JP Morgan and DeutscheBank had high-level traders come out publicly and admit that they had spoofed the gold futures market. Essentially, the bank’s traders were front-running the gold futures market by placing fraudulent buy offers that they had no intention of ever executing, to make it look like the price demanded per oz was one number versus another.
While this is unfortunately a common practice among fiat banks, Bitcoin does not fall into the same traps.
Now, let me be clear, I am in no way a Bitcoin Maximalist. I believe Bitcoin brings worth as a store-of-value with a capped hard supply of 21 million, and global utility as a P2P payment network capable of handling large transaction volume without succumbing to the powers that SWIFT and PayPal project onto the world. However, it is not without its flaws (in its current state of affairs, that is). The most glaring problem is the lack of scaling to truly supplant a duopoly like Visa-Mastercard. Bitcoin is not subject to the same factors as the US Dollar, like, for instance, the price of a barrel of oil. At the time of writing, according to Binance.US, the price of 1 BTC is $19,409, which could buy (at ~$46.50/barrel) about 417 barrels of oil. But, who would be capable of storing so much? Where would it be kept safe for people to preserve their wealth in the asset? Can you collateralize oil to acquire financial leverage, considering it is a perpetually-deflating asset that will never maintain price stability or allow for any price discovery?
In my view, no, you can’t, no matter what some oil industry insiders might tell you. Oil only has value because of its uses, not because it can “preserve” wealth, because, it clearly can’t. Just look at how poorly all the MLPs (Master Limited Partnerships, the corporate structure that owns and controls the vast majority of the US’ domestic oil transportation, exploration, and development) are performing this year, even compared to the price of a barrel of oil. It’s no surprise that many MLPs have lost 70% of their value relative to January 1st of this year.
Now, I’m no expert on the US oil & gas industry, but, if no one is traveling (due to travel bans among many other barriers currently restricting the free movement of people), then who the hell is buying fuel? We saw what happens when no one travels, the price per barrel of oil collapsed to -$43, a previously unconscionable negative value.
I know what you’re going to ask: “If all this is true, then how come no one is doing anything to change it? What can we actually do?
Well, in case it wasn’t obvious enough, the US economy is completely dependent upon the price of oil, particularly it being above $60/barrel, just to break even, let alone make a profit. The market is paralyzed by fear, weak hands force massive draw-downs in funds that lead to days-long selloffs like the one we witnessed in March. When Americans panic, everyone loses, plain and simple.
If you want to make it through this, don’t put your faith in things that other people can control to save you.
Bitcoin is by no means a perfect asset, but at least, Bank of America can’t empty your cold wallet, like they do with their depositors’ checking accounts...