‘Divursufricashun’ And The Great Gold-For-Bitcoin Trade

This was a week to forget for market participants. It could be seen, in hindsight, as the beginning of something.

What that “something” is I’m not sure, which makes this assessment inherently useless as an investment thesis.

But what I do know is that if you’re a retail investor who likes to think of yourself as “divursufried,” you came into Friday with your SPY lower for the week, your TLT lower for the week, and your GLD lower for the week.

Where does that leave you?

It leaves you sitting in the exam room staring at the family doctor, who is, in turn, staring down at your recent blood panels with a slightly furrowed brow. “Mr. Johnson, there’s nothing to worry about right now, but your SPY count has fallen a tad, your TLT is down quite a bit since your last checkup, and so is your GLD.”

“How’s my cholesterol?” “Oh, that’s fine. No worries there.”

Spot gold is sitting near a seven-month low. Apparently, the debasement theme has either run out of “oomph” as a driver or else investors are simply looking elsewhere in search of something that offers inflation protection not because it’s a stable “store of value” but because it’s tethered to the reflation narrative itself and is thus prone to rising in tandem.

In short, markets seem to think that so far, this is the “wrong” kind of inflation for gold bulls. “Reflation” is a narrative about an assumed acceleration in economic activity. Inflation is just… well, it’s just inflation, and it plays into the fiat currency debasement thesis. The latter is good for gold. The former, not so much. Better growth outcomes could be dollar positive, deficits be damned, especially if yield differentials end up moving in favor of the greenback.

Gold rose with breakevens amid the rebound off last March’s panic, while reals were pushed inexorably (and mechanically) lower.

In a Thursday evening letter, professional trader Kevin Muir noted that gold has become detached from real rates. “I didn’t realize it back last summer, but gold’s relationship to real rates was about to break,” he wrote, adding that “it’s easy to see the obvious linear relationship over the past couple of years, but there are a whole slew of observations in the green circle that seem out of place.” He was referring to the regression shown below.

Macro Tourist, BBG

More recently, reals have stopped falling. In fact, they’re rising. Albeit from deeply negative levels. The opportunity cost of holding an inert piece of metal is becoming less negative.

In his Thursday evening letter, Kevin attributed gold’s stumbles mostly to Bitcoin. He cited Raoul Pal, who, when I prompted him last year on social media, suggested the best place for a brand new investor to allocate her first $10,000 would undoubtedly be Bitcoin. By his own account, he (Raoul Pal) invested some 98% of his liquid net worth in Bitcoin (rotating from gold) last November. Or at least according to a tweet that Kevin used in his letter (I follow fewer than 80 accounts on social media, and Raoul Pal most assuredly isn’t one of them).

“All I can say is, ‘hats off to you, Raoul,'” Kevin said, generously, noting that his gold-for-Bitcoin exchange was “a great trade.”

And that’s fine. Just like convertible bond offerings aimed at helping turn your business into a giant crypto vault are fine. Until they aren’t. This may be a “great trade,” but it’s a ludicrous investment, by any rational interpretation.

In any case, Kevin’s point was that people are exchanging gold for Bitcoin. That, he reckons, is part of what’s behind gold’s underperformance and, indirectly, the breakdown between gold and real rates. As he put it, “gold is struggling because cryptos have sucked all the oxygen out of Fort Knox.”

Well, count me a buyer of gold on this “dip,” although I’m not sure I’d call it a “dip.” Even if it keeps falling, I’d be content with adding to my (forever modest) allocation if the reason for its struggles is, in fact, a crypto mania.

I’m not as generous as Kevin when it comes to assessing what I think are bad ideas foisted on the investing public, so I’ll just put this out there: Only a Looney Tune would equate the asset represented by the dark orange line (above) with Flubber (i.e., Bitcoin) represented by the dark blue line.

This isn’t an “it won’t end well” prediction. It may end fine for Raoul Pal (and any RealVision subscribers who followed him into this trade). Assuming he did, in fact, put it on as advertised, he’s clearly much richer because of it.

As detailed extensively in the linked article above (documenting MicroStrategy’s aggressive push into Bitcoin) bad and/or potentially dangerous ideas involving schemes to make large sums of money can go extremely well in the near-term. And often in the medium-term too. I’d wager I understand more about “risk management” (from a holistic, and often acute perspective) than most “traditional” investors, traders, and fund managers will ever be able to fathom.

That said, an asset allocation that is heavily weighted to Bitcoin will probably mean that, over the long-run, you’ll find your doctor staring blankly at you after walking in with no lab work and no stethoscope, only an attorney and a priest. “Mr. Johnson, I’ve got some bad news…”


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13 thoughts on “‘Divursufricashun’ And The Great Gold-For-Bitcoin Trade

  1. The most interesting thing from a quick internet search.

    “There’s likely a 5-10 years window for Bitcoin to strengthen its security measures so that it can survive hackers armed with quantum computers.”

    “IBM promises 1000-qubit quantum computer—a milestone—by 2023. For 20 years scientists and engineers have been saying that “someday” they’ll build a full-fledged quantum computer able to perform useful calculations that would overwhelm any conventional supercomputer”

    1. Yes I have. I’ve explained that dozens of times. Just because you refuse to acknowledge it, doesn’t make it so.

      This becomes a bit silly past a certain point. After every article, someone insists on an explanation. I provide a link to a previous article, and then that’s not good enough either. It’s never good enough when it comes to Bitcoin.

      Past a certain point, folks are essentially just demanding recaps of past articles. I oblige, but it never matters. Which is characteristic of cult “assets,” by the way.

      You’re a regular reader. I’m reasonably sure you’ve read those other articles. Plus, there’s a “search” feature on this site. Just type in “Bitcoin.”

      Given that, I think I’m entirely justified in characterizing this comment of yours as a bit disingenuous.

      I write, you read, and then if you want to keep insisting that I didn’t write, I suppose that’s your prerogative, but I’m not sure it’s very constructive.

      1. As you say, I am a regular reader (well, in recent months, not going back years) and it was an honest question but I’ll check your Bitcoin articles again.

        My general impression was that you were dismissive of Gold as well. Which was fine, a coherent view of assets that don’t generate cash flows and thus their value being “whatever someone is willing to pay for it”.

        The fact that you own gold in your portfolio, otoh, was new info and does seem a bit contradictory with your (apparent?/my understanding) disdain for BTC, that’s all.

        I’ll scan the articles for Bitcoin and gold, see what I missed. Till then…

        1. To the reader: I, too, have taken away that the host of this richly wonderful site belittles gold, sometimes with a derision that others might reserve for when talking about a relative they can’t stand to see. Perhaps I have just mistaken the rich veins of sarcasm toward gold for what instead the author considers an obvious component in any well-diversified portfolio.

  2. Sign of a top?

    This morning I was treated to a discussion of Bitcoin on the radio. No, not Bloomberg radio. It was on WEEI, a regional sports station.

    It pushed aside the relentless musings over how the Pats should fill their quarterback void, so not all bad.

  3. A quick internet search of Bitcoin acknowledges that it could drop to Zero relative to currency. Gold has industrial and decorative value. Implausible that gold drops to zero.
    If to prove a quantum computers worth by un-encryption of crypto and making public every bit of it without thievery it would be a case of fluid intellectual property showing mastery of finite intellectual property. And one hell of a sales pitch.

    Bitcoin is nothing more than a piece of finite intellectual property that investors give value to.

    1. If Gold has to reply on its industrial value, its worth won’t be very different from zero. Check the size of the industrial demand vs. production/reserves.

      The decorative value is, quite a bit, linked to its store of value role. Yes, humans like shiny rocks but jewelry could proceed without gold and will proceed without it if it loses value. No woman or hip hop rappers is going to parade with a chain of a metal worth zilch.

      Just as you won’t impress anyone with semi precious stones right now but a diamond or a ruby will do the trick.

  4. Just for the record… I dabble in gold. But, without exception, the investment is in miners, not in doorstops. At he current price for gold most miners producing gold are making money. A lot of money if the gold deposit is rich enough. A new miner coming on line with a producing mill is usually pretty cheap and the price works it’s way up as the gold production increases, And, without exception, at the end of the year, they publish their yearly production results and they all show that the sales line up pretty closely with production. Somebody is buying all the gold they are producing. There is a market for gold. If people stop buying gold the price will drop, the mines will stop producing it and I’ll look a bit more at silver, uranium, chromium etc. I don’t believe in cryptos and don’t touch them. So far, I’m satisfied with the money I’m making on gold.

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