What the Gold Crash and Bitcoin Crash Have in Common

By Justice Litle

Gold and virtual currency bitcoin crashed in recent days. The crashes have something in common.

First, let’s talk about gold…

The yellow metal plunged by more than $100 per ounce on Monday
following talk that Cyprus would be forced to sell gold to pay back its
debts. Although Cyprus is small in the scheme of things, the move
suggests a precedent of forced sales from larger euro-zone countries
(such as Portugal, Spain and Italy).

This comes on the heels of increasingly bearish outlooks from major investment banks such as SocGen and Goldman Sachs.

Worse, the faster and farther gold falls,
the more likely a mass investor exodus becomes, forcing even heavily
committed hedge fund managers to sell. Fears of a vicious feedback loop
thus lead to self-fulfilling prophecy, as investors rush to the exits.

Gold had already been in an extended downtrend based on the perception that (1) central bankers
have won the battle against further financial contagion and (2) a lack
of meaningful price inflation on the horizon. (It is hard to get real
and sustained inflation when wages are suppressed.)

Gold has long been billed as the only alternative currency not
subject to a printing press. As such, gold is used by many investors as a
form of “crisis insurance” — a sort of credit-default swap for the
entire global financial system. The greater the risk to the system the
more desirable gold becomes.

But now it seems that a continuation of the crisis in the euro zone
could see the market flooded with gold. There are 11,000 tons of the
metal in euro-zone vaults. Gold is a bastion of safety and a shelter of
value in times of monetary and geopolitical crisis. But what happens if
governments are forced to dump their gold to pay back debts?

A major crisis event such as a euro-zone breakup thus becomes an unknown, rather than a positive, for gold.

Bitcoins crashed too in recent days, albeit more severely. Last week, the value of bitcoins fell by more than 50% in one day.

Bitcoins have the same “hard to value” problem as gold, but to an even more serious degree. Whereas gold pricing
has decades and even centuries of history, coupled with a mature market
to buy and sell into, bitcoins are brand-new (relatively speaking) with
no intrinsic value benchmark at all.

In this respect, gold and bitcoins have both the same core virtue and
the same core flaw. Both represent an alternative to government-managed
fiat currencies. Both are hard, if not impossible, to assign intrinsic
value to.

So does the crash in fiat alternatives mean the central bankers have
truly “won”… and that there will be no challenge to fiat’s reign?

Hardly. Neither history nor economics argues that.

It simply means the road to a 21st-century post-fiat world contains
more twists and turns than many expected… so don’t be surprised to see
more serious volatility ahead.

To be continued…

Carpe Divitiae,

Justice