Cryptocurrency vs. Fiat.

Cryptocurrency vs. Fiat.


After generating much hype and fuss, the speculative bubble in Ether (ETH) finally collapsed, providing an excellent opportunity to ride the speculative bubble out on both the uptrend (approximately 1200% price increase) and the downtrend (approximately 60% price decline to date).

The recent speculative bubble in Ether (ETH), priced in Bitcoin (BTC). (Charts taken from Cryptrader)

The question now remains, is the bottom of the crash now in?  Charts can be misleading, especially when assets are only watched when priced in one other asset.  Ether priced in a USD substitute hints that caution is advised, when calling the bottom of the bubble; further price declines may yet be seen:

When priced in Tether (USDT), a rough substitute for USD, Ether looks like a further price decline may yet be realized.  (Charts taken from Cryptrader).

So, has ETH based now? Or is this yet another fake move to spoof market participants on the long side?  Technically another bearish week could be possible, in which case, a price fall would be sharp, and significant, given the market consensus.


Meanwhile Bitcoin did indeed break out above the consolidation pattern which was mentioned here (a day before the Zero Hedge article, incidentally.)  It has bounced off key resistance with declining volume (the 470 BTC/USD mark), and had a rather significant drop this week.  So the question here is as to whether the buy pressure will prove to be enough to punch through that resistance level in a significant manner, or whether it will now decline.  Last year saw a 100% price rise, so breaking through this key resistance level will be critical to sustain the bull run moving forward, and should occur within the next 7-14 days to avoid slipping expectations.

Given potential risks to both, with capital flowing out of the speculative Ether bubble during the crash period, and Bitcoin flagging (in conjunction with precious metals), I would (and have) move(d) to safety  in the short-term while the market momentum is stalling. If momentum continues, or reverses, I will trade accordingly.

Some markets topping? Caution advised.

Some markets topping? Caution advised.

The monetary safe havens:

Sometimes you just get the feeling, based on volatile market moves, that you are in the calm before the storm.  This week (and probably next week) is that week.

First we have silver which has taken off like a rocket over the past 3 weeks, crushing the shorts as it trended up in US Dollar terms. It has not only outperformed gold substantially in percentage terms (with gold already putting in a recent strong performance) but has surprised even the people on the long side of the trade with its highs.  Then, of course, the aforementioned gold prices, which have put in a strong showing recently.

Bitcoin has also shown recent strength, rising 100% last year, and having consolidated and recently smashed through the sell-side momentum.

All three of these assets act like highly liquid (monetary) commodities, shelters from taxation, and counter-party risk. They are safe havens. All three have been showing strength during a similar time period and all three have been stalling at roughly the same time period.

The US Dollar put in a strong showing in 2013 until Q3 2015 (check the DXY:CUR 5-year from Bloomberg: the US Dollar index)

The EUR has been in a bearish trend, with a “waterfall event” in the Q3 2013 through to Q1 2014 but has since based, and has firmed up some recently.

The GBP appears to have entered a bearish market in Q3 2015 but once again firmed up a little recently.

The Australian Dollar, the Japanese Yen, the Canadian Dollar, the Brazilian Real, the Russian Rouble, the Malaysian Ringgit, the Indian Rupee, the USD-pegged Arabian Gulf currencies and the Chinese Yuan have all been subject to negative news articles (along with many others.)  Moves in the currency space have been driven by “who is the cleanest dirty shirt?” (ie: which is the least risky country).

Hot topic issues:
General issues in the macro markets include:
– Is the US Dollar going to collapse?
For some reason May 28, 2016 seems to be the “Mayan Prophecy” for the US Dollar, with retail investors and individuals alike proclaiming the end of US Dollar dominance).

– Is Gold and Silver market manipulation finally coming to an end, causing the markets to break?
Has the market found found “fair price” after years of banking manipulation?

– Is China going to collapse/Is the Yuan going to collapse, or will it be the next superpower?
Again these issues are driven by hedge fund speculation and big Wall Street names speculating against China (supposedly). The reasoning being something to do with China’s overproductive capacity and the spread between their offshore and onshore currency.

-What was this month’s emergency Fed. Reserve monetary policy meeting about and what was the subsequent meeting with Obama about?
Are interest rates set to continue rising? Is more QE impending?  Are we now officially in a recession?  Only a few insiders within the Fed. Reserve, and the political scene will actually know.

And to top this all off you have Eurozone woes with the BREXIT, European sovereign debt problems,  Brazilian unrest, Middle Eastern instability (although that’s nothing new) etc. As well as several critical elections, including the US Presidential race.

So which way are markets moving?
Stocks and precious metals appear to be in a tug of war: this is not expected during a sovereign debt crisis- typically during a global sov. default, stocks, precious metals, and other asset classes (particularly those not subject  to excess leverage) would be trending up.

So we are now left wondering…
– Is this move a fake move ahead of the Global Sov. Debt Crisis?  If so, expect volatility followed by excessive deflation (probably followed by significant inflation.)
– Have expectations of a Sov. Debt Crisis caused the repositioning of institutions into asset classes which would have otherwise been left untouched? ( In which case Sov. Debt Crisis will occur but history will rhyme rather than repeat.)
– Will the role of better historical record and better access to technology extend the maturity time (but not remove the threat) of a debt crisis?

These are valid questions, and the current uncertainty in the markets hints at this. Therefore, a market inflection point is likely coming, and soon, as well as hints as to how to position for the impending recession and its associated problems. As such, extreme caution is advised: timing is a difficult thing. It is just as easy to get ahead of markets and lose as it is to be behind them. Right now, staying liquid and staying nimble is critical.

Edit: I should add, if I was a betting man, and I suppose to the extent that I am involved in markets, I am, I would suggest that the following is the case:

1. The US Dollar will not collapse any time soon, but a new reserve currency regime will emerge: The USD is the largest and deepest market for capital in the world and that alone means that there are many (global) vested interests in keeping it supported in the short-run (next few years.)  An alternative system is needed before it derails, and that could be many decades away.

2. A global sovereign default will happen: though this current market movement may be jumping the gun- it’s probably a little early. Either way, lots of money will change hands over these volatile price movements.

3. Interest rates policy and/or central bank policy will pivot soon: given the Fed. meeting and turbulent market moves, I think central bank policy will be forced to pivot and make a shock announcement (probably a significant rate hike) and/or..

4. We have entered a confirmed recessionary period (liable to be reminiscent of the previous Fin. Crisis, but maybe centered in the Emerging Markets) and the global economy is turning down.

Is a major global financial hub on the ropes?

Is a major global financial hub on the ropes?

One thing that struck me as odd, when going back over the charts posted here is that all of these assets share one thing in common (when physical possession is taken):

  • Havens against taxation.
  • Not subject to counterparty risk.

Of course, as the old economic adage (no doubt adopted from the hard sciences) goes, correlation is not causation.

So, is it possible that something other than tax risk on account of sovereign default is driving these price spikes? Yes. And that something may be counterparty risk.

If this is the case, this would echo the 2007-2009 period in the US and Europe, whereby, financial institutions, faced with unquantifiable risks and the potential defaults of financial partners (driven by the US subprime mortgage crisis), were looking for any asset to tether themselves to.

Could it be that George Soros is right, and that China is facing a serious problem with their financial debt?

I guess this could be feasible based on this week’s market moves.  One way or another, we’ll know in about 1-9 months. As opaque and murky as Chinese markets currently are (and they are murky), the insolvency of major financial institutions is a bit hard to sweep under the rug.

There have certainly been some odd moves in the HIBOR already this year.  The hope, of course, is that the Chinese banks are first, and the Western banks are relatively insulated.  God forbid we have another Global Financial Crisis.

Either way, this week’s moves appears to be driven by capital flows out of risky overleveraged markets.  Keep an eye out for a shock central bank announcement, or a pivot on central bank policy soon.

Saudi Threats and Chinese Gold Fixes.

Saudi Threats and Chinese Gold Fixes.

This week has been punctuated by lots of anti-Dollar sentiment, and the market has been somewhat uneasy.  The first was the Chinese gold fix, with gold bulls and precious metal dealers everywhere proclaiming that “the Dollar is dead!”

This is the typical response from the gold dealers, many of whom, are stakeholders in anti-Dollar sentiment. Some of this derives from the roughly inverse relationship exhibited between the US Dollar and commodities in general and some of it stems from wishful thinking.  For some reason, gold dealers would rather see the global economy collapse so they could laud their wealth* over everyone, than pursue more timely market opportunities.

Regardless, according to the deputy governor of the People’s Bank of China, “the Shanghai gold benchmark will provide a fair and tradable yuan-denominated gold fix price [and] will help improve Yuan pricing mechanism and promote internationalization of the Chinese gold market.”

The fix may indeed have market consequences in the short-run, allowing Chinese (and select financial institutions) to exert market power in the precious metal market space, and it may indeed have more substantial consequences in the longer term (five or more years away), but to assume this will be the end of the US Dollar is quite naive.

And in other news…
Saudi Arabia has threatened to dump approximately 750 billion US Dollars worth of their US Treasuries.  This move highlights the plight of an increasingly desperate and isolated country.  In addition to the regime being publicly blamed for funding Al-Qaeda, there has been a general ramp up of hostility against the regime in Western media on account of the spread of Wahhabism, Iran (their regional nemesis) being given a seat at the international table and unrest on the borders of the kingdom.

This would be a very silly, and desperate move, not only would they stand to lose money if they dumped such a large order on the market in one go, but there are even questions as to whether the kingdom actually has 750 billion US  in Treasuries to sell.  Of course, very few people are in a position to say.

Barack Obama visited Saudi Arabia earlier this week, so while the threat cannot be considered to be entirely idle, it still amounts to kicking over the chess-board in frustration, and thus, is more likely to be utilized as a bargaining chip, rather than being a legitimate policy consideration. This is a regime flexing its muscle and pointing out that it is relevant still, nothing more.

Mel Gibson in Mad Max 2.
Mel Gibson in Mad Max 2 demonstrates how to survive in the event of a sudden US Dollar collapse.   This would be in nobody’s interests aside from nihilists, anarchists and those who eagerly await a trip to the Thunderdome.

A Dollar collapse really is unthinkable..
If the US Dollar collapsed tomorrow, the world would be different overnight. It is unthinkable to the Chinese, to the Saudis, to the Europeans. In fact, it would herald a new dark-age for humanity.

Not only would we lose the deepest and most mature of the global capital markets, but all of these regimes have assets invested in the US.  Call me a skeptic, but it is more likely we will get a reformed (and more equitable) global reserve regime after the markets have punished various national participants.  We need change, but not the sort of change that would send us back to the 1700s in terms of economic development.

*Just to be clear, precious metals should comprise a portion of any portfolio these days, as a hedge against the unthinkable, but the “100% precious metals, living in a bunker in the woods” type strategy is probably 25-50 years too early at a minimum.

How the markets all connect: US Dollar, Equities, Safe Havens.

How the markets all connect: US Dollar, Equities, Safe Havens.

Probably the most counter-intuitive trend we might see over the next few years, is a bull run in equities which is driven by fear.  This scenario defies logic from the perspective of an individual investor, as the typical retail investor views price movements as a function of upside potential (profitability.)

For any student of Game Theory, it should be quite obvious that there are two optimal states- the first is maximizing gains, the second is minimizing losses. The latter is known as a maximin solution.

A maximin strategy, exhibited above, is the outcome of two players facing a set of mutual payoffs whereby the incentives align to the strategy that minimizes loss for both players.

While Game Theoretic concepts might not be directly applicable, the concept of a maximin strategy should be- in times of extreme risk, risk mitigation and capital preservation becomes the key as a optimal payoff.

Why is this important?

There are multiple participants in financial markets- from behemoths like pension funds and sovereign wealth funds, to individual investors, to relatively nimble (and often well informed) hedge funds.  The majority of the capital, however, is tied up with institutional investors- logical, rational, “intelligent” investors. This isn’t the equities market of the 1950s, or the 1980s. The capital has accumulated in the hands of a few institutional participants.

Therefore, it stands to reason that these highly rational investors are now scrabbling around, looking for places where capital can be parked to assure preserving it:

The general  rumor (mirroring my conversations with a few guys I know in investment) is that Bitcoin is being scrutinized as an investment by some hedge funds.  Hedge funds, of course, being smaller and less clumsy than pension funds (and SWFs) could likely take moderate positions in Bitcoin without significantly shifting the market-this is due to Bitcoin’s market-cap, which as of writing this stands at approximately 6.74 Billion US.

Precious metals, namely gold is approximately 7.4 Trillion US Dollars in market cap. Silver is around the same order of magnitude.

When you consider that Norway’s Government Pension Fund Global (GPFG) Sovereign Wealth Fund is over 800 billion dollars in size alone (about one eleventh of the total gold market cap) you begin to see that these markets are tiny, even gold.  The size of various market caps can be viewed here.

A thought experiment..

Imagine you are in charge of Norway’s GPFG, (it could be any sovereign wealth fund, however) and you are aware that some markets are failing.  These are the biggest markets in terms of market cap. In addition your job is to maintain the value of the assets under your management?  What would you do?

Personally I would look for any asset market which was deep enough to absorb the cash under my management. I would need to shift my positions slowly over time (so as to not tank markets- selling 1 billion USD worth of Canadian property in a month, and so on would move the markets in a massive way.)


It is common knowledge that the US Dollar is the global reserve, it is the deepest and most liquid currency market in the world. Furthermore, equities are the largest asset class behind fixed income, with the US equity markets being the the deepest equities market.  If the US Dollar and US equities happened to fail, it would basically signal a new dark age (in which case you’d be better off investing in military grade bunkers, tins of food and ammunition for your citizenry.)

Which might have something to do with why every single market which has been a historic safe haven (as well as some newer asset classes) seem to be on an endless drive higher in the face of a global sovereign debt crisis..

Bitcoin is rising..

Bitcoin 1 year chart in US Dollars, taken from Cryptrader.

As is gold and silver…

Gold 1 year chart in US Dollars, taken from Xe.
Silver 1 year chart in US Dollars, taken from Xe.

Which makes you wonder at what point US Equities will break through the sell momentum (as everyone thinks they will crash right now) and take off to the upside:

The S&P 500 price chart over 5 years. Taken from Yahoo Finance.

And note: property markets appear to be languishing, as do most sovereign debt markets (with the exception of Argentina, which most recently defaulted in 2002.)

Conclusion: For large institutions, US Equities are (just about) the only game in town.  For smaller institutions and individuals Precious Metals, Cryptocurrency and so on remain an option.  Institutional investment can, and will drive these market trends forward, and retail investors may follow after.


Bitcoin heading into new bull leg?

Bitcoin heading into new bull leg?

Bitcoin was easily the best performing “currency” over 2015, with a 100% rise in price from its low.  A series of bearish media articles and a letter from Mike Hearn, one of the leading members of the community and coders for Bitcoin, sent the coin into a bearish market posture.

Since the letter, and despite significant volatility, Bitcoin has only consolidated on its weekly chart:

A Bitcoin price chart (in US Dollars) from the last year. The consolidation pattern is quite clear.

The question remains, will Bitcoin break out? Or will it crash?  If a gun was held to my head, I would suggest that Bitcoin will be heading into a new bull leg soon, and potentially a long-term one.

More on Gold/Silver Ratio.

More on Gold/Silver Ratio.

On March 22nd 2016, I mentioned:

“As of two weeks ago, gold prices had outpriced silver to a ratio of approximately 83- a ratio which was higher than gold’s peak in the height of the financial turmoil during the Financial Crisis (Nov. 2008). It should noted that Gold then fell against Silver to around 32 by 2011.”

Since that point in time, the ratio has dropped down to approximately 73.70, and silver had its best day in 6 months.  A good trade for the individuals who entered into the market on the short side (short gold/long silver.)

Care is advised for the next 2 to 3 weeks. Not only is it unlikely that the markets would bounce of the exact level (though it may happen), the trade is becoming mainstream.  Gold may now well reverse direction against silver, and if so it will do so rapidly.

I would advise against shorting gold in silver terms at this point in time.  A neutral, or reversal stance would be prudent going into next week.