So you want huge capital gains? Yeah – me too! That’s why I acquire precious metals. Precious metals have outperformed the stock market for most years! Prior to 1971, stocks were the best investment, as they produced the largest capital gains or growth (in the form of return on investment in percentages). As stated in my previous blog, The Golden Bull, gold has outperformed the Dow Jones for nearly every year since 1971 on a percentage basis.

I know what you are thinking, Bitcoin outperformed gold on a percentage basis. Bitcoin has outperformed most assets on a percentage basis, as it started at a few pennies and reached a high of about $20,000.00 USD in 2017. It than dropped to about $4,000.00 USD, or an 80% drop. When Bitcoin reached $20,000, some investors sold their homes just to buy some Bitcoin in hopes that it would go higher! The volatility inherent in bitcoin is extreme and controlled by a low volume of investors. This means that if a few investors decide to sell most of their Bitcoins, that a crash will occur.

Furthermore, there are no fundamental reason to invest in cryptocurrencies – they are infinitely divisible and are not backed by any tangible assets. In the future, it is possible to see a gold-backed crypto and this would be interesting for crypto, and precious metals investors alike. Fundamentals refers to the long-term reason why you would buy anything! I buy silver and gold because they are a form of money, are tangible hard assets, that are scarce, and therefore always have value. Gold is bought by central banks, which confirms its’ status as money, or at the very least, a reserve currency. Precious metals also have industrial uses and play a major component in the goods we purchase every day, from iPhones, to jewelry, to automobiles! In contrast, cryptos have absolutely no use for anything other than an investment based on emotion as it is not yet effective as an exchange of money!

Fundamentals Vs. Speculation

You must understand the difference between fundamentals, versus, speculation, as most investors confuse these 2 concepts! Fundamentals refers to the reason(s) why you would invest in an asset RIGHT NOW, based on an asset’s HISTORY. History repeats itself, and it is likely to continue, until something dramatic changes with the economy or that asset. Speculation, on the other hand, often ignores fundamentals in place of where you believe the role of an asset will be in the FUTURE. How can you speculate (or guess) the role an asset will play in the future without examining its’ past??? This is why speculation is akin to GAMBLING.

Warren Buffett is known for examining the fundamentals behind companies before investing in them. He will calculate what the future cash flows of a company looks like based on their past performance. I invest in precious metals because they have a history spanning over 5,000 years! This means I need not speculate on what gold or silver will do in the future – I can simply observe the role they have played for society, their dominant uses, and when investors have purchased gold and silver previously to make an educated decision. I even go as far as to say you cannot truly understand how profitable a company is until you understand the role of gold in our economy, and the worthlessness of cash! Inflation works against all of us, companies included. Most people are also not aware that businesses have finite life spans, whereas precious metals last forever!

I go as far as to argue that it is IMPOSSIBLE to truly understand how the economy functions without understanding the role that gold plays in our economy. This is precisely why so few understand how the economy functions. You should question why 1% of the population possesses most of the world’s wealth? You should than question what the 1% are doing that you are not. You need not look very far, as part of the 1% are the bankers and central banks of the world. The largest central banks in the world are hoarding gold as a reserve currency – don’t you think you should too?

Survive, Thrive, or Perish?

Bitcoin is the most popular crypto, but it is not the only one. This is an interesting space and reminds me of a statement that Warren Buffet made about the aviation industry when it first emerged. He stated that when planes first emerged in the market, everyone knew that planes and airline companies would ‘be the next big thing’. What you didn’t know is which companies would survive, thrive, or go bankrupt. Unfortunately, new spaces have much competition, and most of these companies have failed historically when they emerge in new spaces of the market. Many thought this about marijuana stocks as well – I called the exact day they would fall, which was the day that cannabis was legalized! This was a classic case of ‘buy the rumor, sell the news’! Again, I am not disputing that legalized cannabis in Canada is a profitable venture. What I am saying is that there are many companies with weak balance sheets, and you do not know which companies will be around in 10 years from now, let alone 5 years from now! If you are guilty of making forward-looking statements about these new industries and assets – you are speculating! Do you really believe you were the first person to recognize that a new industry is emerging?  Some investors, whether they be institutional, or individuals, are known for taking the opposite bet as you when these assets are in a bubble and thereby profiting off of your loss.

Cryptos are highly speculative investments. They offer large rewards, with large risks. Furthermore, you invest in crypto for the same reason one would buy gold or silver in that you are seeking a decentralized form of currency. I know when I save cash for short term obligations and unforeseen events, I don’t like to see the value of my cash fluctuate in value in large degrees. I prefer a stable form of money, like gold. I’d hate for my currency to be worth $20,000.00 one day, and a few months later, be worth $4,000! This means that I don’t foresee the mass population adopting Bitcoin as a form of payment. It is simply too volatile to be used as currency! The same statement applies to crypto in general as other decentralized cryptos have the same overall trend as Bitcoin.

Crypto-Currencies Have No Evidence To Suggest They Are A Portfolio Hedge!

I am also skeptical about the use of crypto as a portfolio hedge. Bitcoin reached its’ high of $20,000 in 2017. This was the same year that stocks were extremely bullish. Then, Bitcoin crashed, at a time where stocks were continuing to go up in price! You must ask yourself, “if I had a portfolio of stocks and crypto, did crypto actually protect me, or help me achieve balance in my portfolio in 2017?” To contrast Bitcoin with gold, gold has adequately provided a reliable long-term portfolio hedge since 1971! Every time gold was in a bubble, the Dow Jones was low. Every time the Dow Jones was in a bubble, gold was low! How’s that for keeping things simple??? With crypto, you don’t have enough history to anticipate how they will perform in the future. In a way, this provides a great speculative opportunity. For those who prefer to invest, as opposed to speculate, just get gold and silver!

Cryptos, like Bitcoin, also have huge competition, from other decentralized cryptos, as well as, centralized cryptos, like the JPM coin and Facebook Libra! I can see the mass population adopting the Facebook Libra as an example because it is tied to a platform that many people use already, and it is also tied to the dollar, meaning that its’ value won’t be that volatile! This also means the value of centralized cryptos, like the Facebook Libra WILL be susceptible to inflation! Of course, if you use a centralized form of cryptocurrency, this also means that the owner, or creator, of that crypto has full control over the use of your private information! Presently, this is a hot topic about the Facebook Libra as it is a known fact that Facebook will not keep your personal information private. This means Facebook will have access to your purchasing habits and are extremely likely to share this data with third parties and even governments. Next to the concept of time, your privacy is one of your greatest resources that you have, and I urge you not to give it away over ‘convenience’.

Just like you, I also want huge capital gains – but I want to achieve my capital gains in a non-speculative manner. I am not a gambler – I am an investor, therefore, fundamentals and technicals play a key role in my investment decisions. I understand that certain assets do well under certain market environments. I also understand that our global economy is governed by credit cycles. Within a credit cycle, there is a beginning, middle, and end. On average, credit cycles last 8-10 years! This is synonymous with the same cycle that stock markets and most other markets operate in. The last credit cycle began in 2009 when stocks reached their low point after crashing in 2008. The Federal Reserve began printing cash via Quantitative Easing – a fancy word, for a simple practice! We are now in 2019, and we are nearing the end of this credit cycle. When this cycle ends, it will be bad for stocks, real estate, and bonds. These assets may not fall at the exact same time, and usually real estate follows 20-year cycles, but it will be bad for these assets, as we will approach a period of lower growth in the overall economy. This will be good for gold and silver, as this is where investors go when they seek a “safe haven” asset. By understanding this simple concept, you can profit, when most other investors get wiped out! I understand that our economy is cyclical which provides an element of predictability over the long term. What I do not know is how crypto will perform within our credit cycle. Do you??? If so, based on what evidence from the past???

The Technicals of Bitcoin

Let’s examine a chart of Bitcoin since 2013, where each candle represents 1 month of data:

Technically, Bitcoin has a long-term uptrend, given that it rallied from a few cents to about $20,000.00 USD. However, the intermediate trend from 2017-present looks worrisome as it has a downtrend. One of the scariest aspects is the extremely low volume of trades, given the price fluctuations or volatility of Bitcoin. The highest volume I can see for Bitcoin in ANY month since Bitcoin began trading is 2.213 million trades during the month of December 2017.

Let’s take a closer inspection at the price action of Bitcoin. Below, we will examine a 1-year chart of Bitcoin, where each candlestick represents 1 day of price action:

Presently, Bitcoin is trading at $8,391.00 USD. It appears that Bitcoin will be down-trending in the short term. Today alone, Bitcoin had over a $1,400 downward move or about a 14% drop! More pain is due as a break of support signals a short-term downtrend! We can observe that Bitcoin has clearly broken a support point of about $9,200.00 USD. By the way, there is an increase in volume in Bitcoin today. This means there is an increased interest in SELLING Bitcoin!

Here’s the scary part – I have been mentored by some of the top traders with 20-30 years of experience in trading the markets, and one of the rules they gave me was to never trade an asset based on news, and never trade an asset with low volume! Low volume is defined as an asset that has less than 2,000,000 buy and sell orders in a single day for a given asset. The volume on Bitcoin is EXTREMLY low! My rule is to never trade or invest in something with less than a volume of 2,000,000 per day, and Bitcoin’s highest volume in its’ entire history was 2.213 million in ONE MONTH! This means that very few individuals control the price of Bitcoin. If those who own the majority of Bitcoin buy, the price goes up, and if they sell, the price goes down. Ironically, its’ volume was the highest when its’ price was the highest at about $20,000.00 USD. That suggests a classic pump and dump scheme, where most investors bought high, and the insiders sold Bitcoin, taking in massive profits, while the rest of the investors either rode the wave down (and are hoping and praying it goes back up) or faced huge, catastrophic losses! Presently, the volume traded in Bitcoin per month has been decreasing, signaling a lack of interest, or indecision, amongst investors. Also, it is worth noting that when assets get as expensive as Bitcoin, good luck getting a phenomenal ROI! If you were one of the “lucky” ones who bought Bitcoin at $20,000.00, it needs to go to $40,000.00 for you to get a $100% ROI – How likely do you think it is that Bitcoin will reach $40,000.00? Time will tell!

The lack of volume in Bitcoin also means that large, institutional investors, like central banks, hedge funds, and mutual funds are not investing in Bitcoin. Do you believe you are wiser than institutions who hire an entire team of professional traders to find the best opportunities in the marketplace???

In contrast, gold and silver trades 10s of millions, if not 100s of millions in volume per month! That is a stark contrast to cryptocurrencies and is to be expected when institutions like banks, central banks actively trade gold and silver bullion! This is why precious metals are not as volatile as crypto – because many institutional investors, as well as, individual investors actively buy and sell these assets! This means in order to see the type of volatility we have seen in Bitcoin; every single investor and institution would have to buy or sell at the exact same time! The good news for precious metals investors is that most buyers have a tendency to hoard their precious metals, rather than sell.

I Don’t Have a Crystal Ball, But…

I am not a clairvoyant, or prophet. I cannot tell what the future holds per se, but there is a common theme of history repeating itself. Our monetary history looks much like this:

Humans barter to trade goods to get out of a nomadic and subsistence type of lifestyle.

Humans discover the downfalls of bartering which is that different goods represent different units of value – I am pretty sure you wouldn’t want to trade a cow with me in exchange for a tulip! This would be an unfair trade because the 2 goods are not proportional in value! Furthermore, at the time of the exchange, you must have a cow, and I must have a tulip, and we must meet to perform the exchange.

Humans discovered precious metals like gold and silver and create the first, and most reliable form of money, the gold and silver bullion.

The powers that be, like the Roman Empire, Chinese Empire, and modern governments realize that if they debase the currency ( make currency less valuable by legally counterfeiting it), they are able to develop more industry, infrastructure, social programs, and of course, debt, within our society. This helps a particular political party get control over their society by directly controlling the money supply.

Every time that the powers that be have debased a currency, it has ended badly!

Fiat currencies, like the dollar, are the ultimate form of debasement, as they are not backed by any physical hard asset (which possess an element of rarity) and are instead, backed by the faith that a government legally states that the fiat currency has value.

What happens when people no longer trust that fiat currencies hold value? The common denominator is that every time humans have created their own form of currency ‘out of thin air’, it has ended badly.

Both fiat currencies and crypto can be printed infinitely, albeit by different means. Fiat currency can be expanded infinitely, while crypto appears to be infinitely divisible. Both are backed by faith in currency itself, rather than, traditional supply and demand!

The powers that be, like modern governments, and central banks, seek control – do you really believe they will let decentralized cryptocurrencies overtake our fiat monetary system??? When Bitcoin gained some element of ‘popularity’, regulators quickly stepped in by charging capital gains on crypto currency gains.  In contrast, you will not hear as much news about precious metals in general, because the same powers are hoarding these assets!

Supply & Demand Is Natural

The natural rules of supply and demand dictates that as something becomes scarce, its’ value increases, while something that is abundant in supply, decreases in value. You may wonder, how can this be natural, and how do we know if something is actually rare?

After World War I, when the German Mark experienced hyper-inflation, cigarettes were used as money. Germans would hoard cigarettes to ‘save’ their cigarette currency. When everyone saved cigarettes, and they were abundant, Germans would smoke the cigarettes, making them rare once again. What is so fascinating is that Germans knew when cigarettes were rare, and when they were abundant, and reacted accordingly. We can conclude it is natural to hoard rare assets, and it is also natural to use or spend abundant assets.

The problem with fiat currencies and cryptocurrencies is that their supplies are technically infinite. This means that there is no reason to hoard these assets because everyone simultaneously believes they are worthless. Cash can, and is, printed infinitely, while crypto currencies are infinitely divisible.

Gold Vs Bitcoin: The Summary

Let’s concisely compare how gold compares to Bitcoin in a table to summarize the main points discussed:

	Gold	Bitcoin
Intrinsic value or has uses other than money	Yes	No
Scarce	Yes	Technically, yes, as there is a limited supply, however, Bitcoin is also infinitely divisible, which makes it abundant.
High trading volume	Yes	No
Extreme volatility	No	Yes
Decentralized form of currency	Yes	Yes
Portfolio and/or fiat currency hedge	Yes	No
Will always be a store of value	Yes	No
Ability to trade internationally	Yes	Yes
Bought by central banks	Yes	No

Conclusion

I am not completely against crypto currency, as I do see one advantage; it can be used to purchase real money,  in the form of precious metals.

Supply and demand is a natural phenomenon. Precious metals will always have value, because they are scarce. Precious metals in particular, have other uses other than being money, which guarantees that they will always have value.

The same cannot be said about cryptocurrencies, as they may have a limited supply, but are infinitely divisible and not backed by a tangible physical asset. This effectively makes them intrinsically worthless. I have no idea which cryptocurrencies will be around in 5 or 10 years from now, and you don’t either. What I do know is precious metals will be around forever.

The trading patterns involved in cryptocurrencies suggest a pump and dump scheme.

.  You need not take my word for it – the master of the infamous ‘pump and dump’ scheme, Jordan Belfort, famously known as the ‘Wolf Of Wall Street’, has already labelled Bitcoin a pump and dump scheme. The low trading volume and huge price fluctuations of Bitcoin in particular, certainly suggest this is true.

History repeats itself, and every time the ‘next big thing’ emerges in the marketplace, speculators have a tendency of ‘putting all their eggs in one basket’ in hopes that they get a large return on investment. This behavior ended badly during the dot com bubble in the early 2000s, it ended badly for investors in marijuana stocks, and it has also ended badly for cryptocurrency investors.

I want to be clear that cryptocurrency is likely here to stay, however, there is no way of knowing what form, and which crypto will survive. I believe a centralized crypto, controlled by a government or major company is more likely to survive over a decentralized cryptocurrency because there is a greater likelihood that the mass population will adopt and trust a crypto that is controlled by an entity that most people have faith in.

I prefer not to speculate, which is why I do what the 1% are doing, which is buying precious metals. Central banks buy gold. Big banks buy silver. I don’t know of any banks that buy cryptocurrency. I follow the lead of those who control our economy, which is predominantly banks.

Shawn Sklar, Broker and Contributor at Worldwide Precious Metals