Gold, Bitcoin, and Inflation

by JDH on March 6, 2021

Gold

Well, gold isn’t doing well.

From a peak of well over $2,000 in early August, gold has collapsed, dropping almost 19% over the last 211 days.  The chart shows an obvious downtrend, with no obvious signs of support, as gold closed on Friday under $1,700 per ounce.

A drop to well under $1,600 is easily possible, and major support may not exist until we retest the lows of March 2020 around $1,450.

The 200 Day Moving Average sits at $1,860, so that level may be the first area of resistance.

This begs the question: how is this possible?  Gold is supposed to be a hedge against inflation, and we know all governments are printing money like crazy, so why do we not have rampant inflation?

Inflation

Two reasons: First, we do.  The money being printed is going to the rich, not the poor, so if you give people excess cash, they invest it, in stocks, and hard assets like real estate.  In those areas, prices are obviously increasing.  Giving $2,000 to someone who lost their job merely allows them to replace their income with a different source of income, which is not inflationary.

The second reason we don’t have inflation is that we live in a profoundly deflationary environment, due entirely to the existence of technology.  Technology leads to “creative destruction” which drives down costs.  For example:

  • Electric vehicles
  • Robotics
  • Artificial Intelligence
  • Gene sequencing
  • Blockchain technology

Think about an internal combustion engine.  There’s a lot of stuff that goes into an internal combustion engine, and you need a lot of ancillary business to produce one, and you need oil drilling and refineries and distribution systems to get the gas to the car.  An electric motor is much simpler, and you can plug it in at home, so need for oil rigs, pipelines, and gas stations.  That is deflationary.

And blockchain, which leads to our next point of discussion:

Bitcoin

After getting close to $60,000 on February 21, Bitcoin corrected down into the $43,000 to $52,000 range, but a year ago Bitcoin was under $4,000, so if you want to see where the money printing is going, there it is.

Is this the end for Bitcoin?  No.  I still believe we will see $100,000 Bitcoin before the end of 2021, so pullbacks now are likely a buying opportunity, should you choose to speculate in this arena.  A correction below $40,000 is easily possible, perhaps lower, but there is so much institutional money going into this space that a crash back to $4,000 is highly unlikely.

Of course I could be completely wrong, this is not financial advice, these are the mere ramblings of a deranged blogger, so do with it what you will.

Thanks, and see you next week.