Here’s a question a lot of gold bulls are asking lately: why isn’t gold going up? They point at increasing world tensions (mostly North Korea), rising levels of government debt (in the US and across the EU), and mountains of money thrown at major economies through quantitative easing programs (the US and EU). Traditionally, this sort of uncertainty would drive up gold prices.
And that’s the question for us: why aren’t people really worried right now, and running for the protection of safe haven assets like gold and silver?
The answer is that they are, but the ways in which they’ll express that worry are complicated. The first thing you have to remember is that markets are made up of people. People are emotional creatures, not rational ones. Yes, their decisions do have some sort of rationale. But any student of human behavior has noticed that two different people, when put in the same situation, may very well do two different things.
As the ancient mystery schools used to say, thus begins enlightenment.
Most people have a limit to how much bad news they want to hear. Then they will stop listening and look around for any good news to cling to. This was very evident last week. North Korea launched a missile over Japan and dropped it into the sea within a few miles of their pre-announced plan? And that missile is capable of easily reaching Hawaii carrying a nuclear bomb? We’ve heard a similar story before – isn’t it almost Thanksgiving? Let’s decorate the house for winter!
That’s the first principle gold bugs need to understand right now. Between North Korea, fighting between politicians, cultural unrest, and Donald Trump, many Americans are closing down to bad news and looking for reasons to hope.
If you’re into trading or investing, where is the good right now? Two big new hit sectors – pot stocks and cryptocurrency.
In the US, pot stocks are still somewhat frowned upon, and there’s a lot of legislation to get through and around. But cryptocurrency is still fair game in most places, especially Bitcoin.
In the past, when people were worried, they’d buy some gold and feel good about it. The shiny yellow metal has signified wealth for many centuries now, and probably still will into the distant future. Bitcoin offers a similar promise in a modern technological package. Modern technology offers lots of endorphin-promoting happiness through cell phone apps, pretty graphics and even happy sounds. No wonder younger investors flocked to it over the past year. You can even watch Bitcoin flow around the world at the FiatLeak website here.
Only recently have established brokerages even begun to acknowledge there might be something valuable or useful in the cryptocurrency space. And of course, with their interest comes money. Small at first, but make no mistake – when Wall Street gets into something the numbers can stretch your imagination.
So for this first installment of ‘Why Isn’t Gold Going Up?’, we’ll point at Bitcoin specifically, and the cryptocurrency arena in general. Rather than buying gold, newer investors have been buying Bitcoin and other cryptos, and so a portion of consumer demand is missing from the market. That demand may come back, as any big shock to the Bitcoin story is likely to have a large backlash. Two places such a shock might come from: Regulations to control or tax Bitcoin in the US. China has already passed similar laws.
And Number Two: Any technological breakdown in the Bitcoin system, which relies on internet connectivity, a large mining network, and lots of security. There have already been security problems with Bitcoin, and there will doubtless be more. Timing is crucial – the wrong piece of news at the wrong time could send Bitcoin values tumbling rapidly, and that could get gold prices moving again.
So while all that is quite dramatic, the principle for our purposes here is quite simple. We’re back to basic economics: Reduce demand and prices can’t rise much. That’s what’s happening with gold prices right now. With the advent of popular substitute goods, demand has fallen and so gold prices aren’t rising. Bitcoin is the new guy on the block draining demand from gold as a safe haven. There are other reasons, which we’ll cover in the coming days.
Signed, The Gold Enthusiast
DISCLAIMER: The author owns 0.0573 Bitcoins.