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The Cryptographic Indicator for the Market in Precious Metals

2023-05-21  Uziel Udayle

What if Bitcoin has just reached its peak? What kind of impact does this have on the price of gold moving forwards?

Back in the day, when individuals wanted to buy gold but didn't actually want to keep it in their houses, pay for safekeeping and insurance while transporting it, etc., there was a market for gold bullion. The demand vacuum was supplied by various types of e-gold and e-bullion accounts, in addition to total pooled funds. While individuals who are not familiar with the precious metals market might find this concept peculiar at first glance, just writing about it brings to mind a particular moment from the film adaptation of The Lord of the Rings.

"I was there, Gandalf, more over three thousand years ago...

Elrond makes this statement while he is outlining the weakness of men and how it has contributed to the current quo in Middle Earth.

Therefore, the answer is that I was present during the time when e-gold was growing popularity. It is not clear whether those e-gold accounts actually had any physical gold backing them up or whether they were only hedging their exposure through futures contracts. The unyielding researchers asserted that if you can't physically hold it in your hand, then it's merely "paper gold" and not a real thing that would offer security in the event of major financial upheaval. Some people suggested that if you have the serial numbers of the identical bars that you own, then it most certainly exists and offers genuine protection.

Then came exchange-traded funds (ETFs), such as SPDR® Gold Shares (NYSE:GLD), which was introduced in 2004, and iShares Silver Trust (NYSE:SLV), which was introduced in 2006 (causing a local crash in the price of silver, which confused many people who were not aware of the buy-the-rumor-sell-the-fact sort of market reaction).

The question of whether or not they are backed by actual metal is still being discussed. And the more evidence ("evidence"?) that one side (believers / those who question the existence of certain metals) presents, the more pushback it generates on the other side.

As a side note, some exchange-traded funds (ETFs) permit in-kind redemption of physical metals. This means that you may go to the exchange and pick up the bars, which suggests that the bars have to be there. This may be the optimal solution for investors who are looking to strike a balance between convenience and safety.

related link: Teen Investors: What They Need to Know


And just when it appeared that the status of the alternatives to fiat currency and the mechanisms by which one may hold them is stable...

When cryptocurrencies appeared on the scene, the situation immediately became very different.

At first, there was only Bitcoin, but soon after, other cryptocurrencies started participating.

To tell you the truth, I had heard of it many years before it became popular, but I just brushed it off as being something that was quite uninteresting at the time. I also disregarded my intuition, which told me to get some extras just in case. The takeaway here is that having a hunch is absolutely necessary in order to know about something before others do (and to have faith in that understanding). When this happens, the market and the investors who create it remain in such profound denial of something that is going to become massive that the "unclear periods" last for a great deal longer than they need to (when viewed from an objective perspective).

Can you recall the very first stages of the pandemic? When viewed with the advantage of hindsight, the majority of the things that occurred were inevitable; nonetheless, it was far too simple to ignore them at the time.


The Introduction of Cryptocurrencies and Valuable Metals

When cryptocurrencies first appeared, it was like there was a hip new child in the neighbourhood. The future has at last come to be! A genuine alternative currency that is more compact than the dollar, the euro, the yen, and other fiat currencies. In addition to that, it exuded a "futuristic" atmosphere.

Similar to gold and mining stocks, but more sophisticated and with greater potential.

That is how it appeared.

The markets for precious metals and cryptocurrencies have become increasingly comparable over the course of time. Not on a fundamental level, but rather via the perspective of investors.

Bitcoin was the leading metal with a high price per unit, just as gold (and its price), which was the benchmark for all other metals.

Ethereum became the more usable (intelligent contracts) counterpart that was nonetheless cheaper in nominal terms – just like silver (with its various industrial uses, smaller stockpiles, and so on). In other words, Ethereum became the analogous cryptocurrency to silver.

Last but not least, there were a lot of altcoins (*cough* shitcoins *cough*) that promised instant wealth, just like junior mining stocks. Some of those alternative cryptocurrencies enabled users to make enormous profits, similar to the gains made by junior miners who stumbled across rich deposits. And other alternative cryptocurrencies have just thrown away all of the capital that was invested in them, exactly like some junior miners who have sought bankruptcy protection.


In the beginning, there was a greater disparity between their price movements. They responded negatively to the movement of the USD Index in a variety of distinct ways; nevertheless, given that they were alternatives to fiat currencies, it should not come as a surprise that they did so. On the other hand, the distinctions started to disappear as time went on.

Technical Analysis of Gold, Silver, Bitcoin Miners, and Bitcoin
These days, the markets for cryptocurrencies and precious metals appear to be quite synchronised with one another.

Please have a look at the chart that is provided below for more information.

Bitcoin makes up the upper section, while gold (orange), silver, and the HUI Index, which is a proxy for gold stocks, make up the lower section. Bitcoin is located in the upper section.

The last time that Bitcoin and PMs moved in opposite directions was around the beginning of 2022. When that occurred, the price of gold, silver, and mining stocks all went up in a noticeable way, but the price of bitcoin just went up very slightly.

It is easy to comprehend Bitcoin's performance at the time because it had just finished forming a double-top and lacked the energy to stage a further rally at that point.

Since that time, the precious metals market and the cryptocurrency market have moved in a manner that is quite synchronised with one another.

To be more specific, after reaching their peak in the early 2022, they all plummeted together.

Bitcoin reached an all-time high of more than $60,000 USD (in fact, I blogged about the peak being close at hand when the cryptocurrency was trading close to $50,000 USD), and then it dropped all the way down to $15,000. That's when I wrote that it had reached its lowest point, and certainly, it had. From those levels, it began to stage a comeback.

As a side note, do you recall how pessimistic everyone was back then? It was fascinating to observe how extreme pessimism can be bullish and vice versa. Everyone and their brother was in "to da moon!" mindset when the price of bitcoin was above $50,000.

At the same time as Bitcoin prices were falling and correcting, the market for precious metals experienced the same thing. And out of the three assets described earlier—gold, silver, and mining stocks—the price movement of the latter was the one that was closest in sync with the movement of the price of bitcoin.

A Word of Caution to Investors
This takes me to the response to the question that was not asked:

Why am I including a discussion of the Bitcoin market in my assessment of the precious metals industry today?

The important thing to note is that a substantial development took place in the Bitcoin market, and I wanted to lay the groundwork for the technical connection that exists between the two markets. It's not a coincidence that they moved in together; in fact, it makes quite a bit of intuitive sense on a fundamental level.

Because of this, it follows that the indications coming from the Bitcoin market are likely to translate into the outlook for the precious metals market, and more specifically into the outlook for mining companies.

So, what does the chart for Bitcoin look like at this very moment?

It is a message that indicates, "Hey, my rebound is probably complete, and I'm about to slide."

If you take a look at the chart, you'll note that the price of Bitcoin rose to the dashed line before falling again. This line uses the previous 2021 low with relation to the weekly closing prices as its point of reference. Bitcoin's intraday price has lately gone higher than the lows from 2021, but its weekly ending price has not yet moved higher than those lows. Because weekly closes are typically more important than intraday price extremes, it was confirmed that the price fell below those levels once it broke below them.

This indicates that the peak in Bitcoin prices has most likely already been reached. The price, especially when expressed in nominal terms, more than doubled from its most recent low point. Not just precious metals and equities, but also other markets, such as foreign exchange and crude oil, copper, and other commodities, have a tendency to favour round numbers. This is true not only for price levels, but also for levels based on performance. And while we're on the topic of round numbers, the level of $30,000 that Bitcoin achieved not so long ago is likewise a round figure.

The aforementioned makes sense when seen from a more fundamental perspective as well. CBDCs, also known as gov't cryptos, are beginning to take shape as we speak. CBDC stands for central bank digital currency. And let's say that governments and other financial institutions seek to mandate the use of their cryptocurrencies. In that scenario, it will be quite simple for them to impose a complete prohibition on the usage of other cryptocurrencies, such as Bitcoin, or to tax its transactions. Because of this growing risk, the popularity of cryptocurrencies is expected to continue to decrease.

That has always seemed to be the most fundamental issue with Bitcoin to me. It is quite improbable that the Powers That Be will willingly hand over their economic control in the event that it grows to such a size that it poses a danger to the current monetary order. There were wars fought over that... Moving towards CBDCs indicates that they recognise that some aspect of their situation will need to evolve, but they wish to maintain control over that evolution (or see it as an opportunity to further their influence).

As a result, the precious metals are likely to see a decrease, and mining stocks are likely to be impacted to the fullest extent possible as a result of this.

The performance of gold stocks has been weak recently compared to the performance of gold, as shown at the bottom of the chart. And if Bitcoin continues its downward trend, the effect is likely to become even more pronounced. Those that are in a position to capitalise on those shifts will very certainly be rewarded very handsomely for their efforts.

And in the same way that it appeared implausible that cryptocurrencies would advance at all and then drop from $60k (and then double from $15k), the "unlikely" slide of the precious metals and – in particular – mining equities is sure to take many people by surprise. You have been given fair warning.

2023-05-21  Uziel Udayle