Market Beat: Bitcoin and gold
January 9, 2014
What do Bitcoin and gold have in common? They are both physical assets in demand by investors who fear paper assets.
Central banks are increasing the money supply at high rates. The U.S. money supply increased by about 14 percent over the last two years. In the same time frame, the supply of gold increased by about 3 percent.
More and more investors are buying tangibles, like fine art, antiques, vintage wines and automobiles. Bitcoin has been an interesting phenomenon — it is a virtual currency that is widely accepted and not subject to government control.
Today, Bitcoin is more than $1,000 on the news that Zynga, the online game provider, will begin to accept Bitcoin. Recently, China announced it would limit the use of Bitcoin, and its value dropped sharply on the news, but has since recovered.
The supply of Bitcoins is set at 21 million, and currently there are 11.5 million circulating. New Bitcoins are created through a process known as "mining," though there is no similarity between hard rock mining and the computerized process of making new Bitcoinage.
What Bitcoin is not subject to is the leverage that the gold market is. The price of gold dropped about 30 percent last year. It's all time high was more than $1,900 per ounce in August of 2011.
Demand for physical gold is higher than ever. China has been purchasing and storing large amounts of the precious metal. Gold is also a major export product for the U.S.; we have exported more than 400 metric tons of gold each of the last few years, and approximately 80 percent of that gold is mined in our neighboring state of Nevada.
What's really interesting about the gold market is the amount of leverage that the gold price is subject to, from futures and options contracts and other derivatives. The global market for physical gold has been running at about 120 million ounces over the last few years.
In 2010, according to the CPM Gold Yearbook, the futures and options volume was more than 6 billion ounces, and the LBMA (London Bullion Market Association) volume added another 4.7 billion ounces.
Annual gold production runs about 2,800 metric tons, and every day about 9,000 metric tons trades on the exchanges via derivatives. This leverage makes the price of gold more volatile.
Investors who want gold in their portfolio as an inflation hedge can choose between paper gold, physical gold or the stocks of mining companies with known reserves.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at http://www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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