Has Gold Bottomed? Has Bitcoin Topped?

by JDH on April 17, 2021

Good questions.  I have no idea, but allow me to engage in some unfounded, uninformed speculation, because that is of course what you pay me to do.

Let’s start with gold.  Gold had a great run, topping out well over $2,000 an ounce in August 2020, before starting a long slide to well under $1,700 in March, 2021.  It could be argued that a double bottom was formed around $1,675 in late March/early April, and the bottom is in, and now it will go higher.

Perhaps.

I’ll be more convinced when gold breaks the down trend line decisively above $1,900, but at least, so far this month, it appears to be moving in the right direction.

The technicals are improving, and perhaps the fundamentals will also improve, with reports that China is buying a lot of gold:

Since February 2020, the country has on average imported gold worth around $600 million a month, or roughly 10 tonnes, Chinese customs data show.

In 2019 its imports ran at about $3.5 billion a month, or roughly 75 tonnes.

Is this just the next stage in China seeing the writing on the wall for the USDollar as global reserve currency…

That buying could account for the increase in price, and if China is preparing for a gold-backed yuan, that could have a big impact on the price of gold.

For now, I’m holding my high quality gold stocks, and waiting to see what happens.  I’ve held this long; I see no point in liquidating at these levels, and I did do a small amount of buying this week.  (For context, gold is trading at the same level it was at in both July and December, 2020, so it’s not as though we are at multi-year lows).

Bitcoin

It appears obvious to me that Bitcoin is doing well, and that strength is likely because many investors have bought into the narrative that Bitcoin is a “store of value”.  I agree. Bitcoin is not a “currency” in the sense that we will use it to go out and buy a jug of milk.  It’s too cumbersome for that.  There will be other cryptocurrencies that will fill that void.

But as a store of value, Bitcoin is ideal.  There is a limited supply, so the government can’t inflate it, and it’s a lot easier to store than gold.

It’s chart is a thing of beauty.  So far this year it’s had four new all-time highs, followed by a pullback.  We may or may not be in one of those pullback phases now, but here’s my prediction:

I don’t expect to see $30,000 again, and a drop to $40,000 would surprise me.  For context, $40,000 was last touched on February 8.

As of today, Bitcoin is up 121% year to date, and I fully expect to see Bitcoin hit $100,000 in 2021 (and likely before the end of the summer).

Yes, Bitcoin is risky.  So is everything.  Do you want to hold bonds that pay zero interest and have constantly depreciating purchasing power?  Or do you want a shot at something better.

The prudent investor already has at least a small portion of their portfolio in Bitcoin.  Even if you only had 10% of your portfolio in Bitcoin, and 90% in cash, your portfolio is up over 10% so far this year.  If Bitcoin crashes to zero your portfolio declines by 10%.  There is no chance that Bitcoin goes to zero, so even if it has a substantial correction your portfolio is perhaps flat on the year.  That seems like a great asymmetric bet to me.  Massive upside, with less downside.

There will of course come a time when you will want to rotate out of Bitcoin, or reduce your exposure, and that’s fine.  I also hold Ethereum, the number 2 ranked crypto, and I have tiny holdings in two other “alt coins” for some diversification.

It’s a fast-moving space, with constant changes, so you have to watch it closely, but if you aren’t in the game, you are missing out.

That’s my report.  Thanks for reading.  More next week.