Crypto Currencies in Our Future? Inside Scoop on Bitcoin...
Precious metals enter December battered but holding near support levels. Talk of tapering by the Federal Reserve provided much of the initial impetus for lower prices last spring. Disappointing charts – and the technical trading surrounding them – are now prolonging the suffering for gold and silver traders on the long side. 2013 is set to be the only overall negative year in the precious metals since the bull market began in 2001. Bullion investors may be frustrated by poor recent price performance, but most remain committed to their positions for the long-term. Based upon the numbers of Money Metals Exchange customers looking to sell, less than 5% of those holding coins, rounds, and bars are willing to part with them at today's prices. Meanwhile, the U.S. Mint has already set an all-time record this year in sales of silver American Eagles.
Bullion Vs. Bitcoin
Bitcoin is making news lately. The "crypto-currency" emerged just a few years ago and struck a chord with people who want to transact in private and promote an alternative to endlessly diluted fiat currencies. Holders store them in a digital wallet purported to have impregnable encryption, and they bank on the ultimate supply of Bitcoins being limited to 21 million. Recently, speculators joined the party, and Bitcoins, valued in U.S. dollars, skyrocketed to over $800 each. You won't find a larger proponent of privacy and honest money than Money Metals. We very much look forward to a day when central bankers and insatiable governments no longer control (and misuse) currencies. While we are sympathetic with the ideals behind it, some have actually begun promoting Bitcoin as a superior alternative to physical bullion. So it's important for people to understand what digital currencies like Bitcoin can, and cannot, offer.
What they can offer is convenience as a medium of exchange. Or at least Bitcoin has that potential – should it attain wide acceptance. It is easy and inexpensive to send payments electronically all over the world, but only a tiny handful of retailers accept Bitcoins at the moment. (This article is continued below...)
The number of merchants who accept Bitcoin is growing, but mainstream acceptance may prove unattainable. The wild volatility in prices isn't helping adoption. Merchants aren't generally prone to speculating, and they are fearful that major losses could result on Bitcoin holdings before they'd be able to convert the Bitcoins back into whichever fiat currency they need to operate their business. Bitcoins cannot serve as a reliable store of value. Gold (and silver) were prized intrinsically for their beauty and utility before people began minting coins and exchanging them as money. Owners can be certain precious metals values will never be zero. Not so for Bitcoins. No one values the electronic zeroes and ones that comprise each unit. Without confidence that someone else will accept Bitcoins in exchange for value, they are worthless. To avoid major devaluation and obsolescence, Bitcoins must also weather an assault from competing crypto-currencies. There are several competitors already – including Litecoin, Peercoin, and Namecoin – with more on the way. Bitcoin has the advantage of being first in the market, but any of the alternatives may prove to be the better "mousetrap." And, again, should Bitcoins lose the race to win confidence and wide acceptance, their intrinsic value is zero.
These crypto-currencies rely on the world wide web to function. So holders should not expect to be able to transact 100% of the time. Risks include power outages, hackers, and governments monitoring the internet, tracking transactions, and shutting down perceived threats to their monopoly on fiat currency. One of the major Bitcoin exchanges was targeted by hackers last week, and congressional hearings are already being held. Only physical precious metals are truly "off the grid." The bottom line is that an investment in Bitcoins is a highly speculative bet on the success of a particular brand in this new breed of currency. If it survives and succeeds in getting merchants to adopt it, it will be a revolution; quick and secure payments controlled entirely by the market and not bureaucrats. But Bitcoin and its digital alternatives cannot now, nor will they ever be able to replace physical bullion as a reliable store of value with maximum privacy.
Potential Market-Moving News This Week
- Monday, Dec. 2nd -- ISM Manufacturing Index. The report for October showed a modest rise vs. September. Recent data has shown weakening in manufacturing, so today's number may disappoint.
- Tuesday, Dec. 3rd -- New Home Sales. The real estate market is slowing. Recent data showed the 5th consecutive month of prices rising at a slower rate, mortgage applications are way down and there is evidence that hedge funds and large investment pools are starting to lose their appetite.
- Thursday, Dec. 5th -- GDP. Investors will get a look at the revised GDP numbers for the third quarter. Growth has been tepid but positive. A negative surprise may have the perverse effect of boosting asset prices as markets would anticipate an extension of QE.
- Friday, Dec. 6th -- Employment Situation. Fed watchers count the monthly employment report as critical in calculating probabilities for continued stimulus. Unfortunately, few reports are more manipulated and misleading. The official unemployment rate has drifted lower in the past two years, but the improvement has nothing to do with job creation. Rather bureaucrats simply stop counting people who have been out of work for more than a few months.
This week's Market Update was authored by Money Metals Director Clint Siegner.