The Features That Make Crypto Appealing are Naturally Inherent in Precious Metals

North American markets today, Friday, viewed several hours before the 9:30 a.m. EST opening, appear poised to start strongly positive with all major indices in the green. The S&P 500 is wavering at time of writing but appears likely to stay positive and perhaps improve during the day.

European markets are open at time of writing and are mixed with the FTSE 100 down while the CAC 40 and DAX are in positive territory.

Amongst precious metals, the safe havens of gold and silver are down. Amongst currencies, the Euro is up while the Canadian dollar is down and the British pound sterling is flat. That seems understandable, according to Jeremy Thomson-Cook, Chief Economist at London-based payments specialist Equals Money. “Sterling is giving back some of the gains that it has made this week despite a strong retail sales report that showed just how much us Brits love to shop,” he says. “Despite a 9.2% increase in retail sales, sterling has fallen which suggests that a lot of good news is priced into the pound currently and therefore for further gains, we’re going to have to see something that we have yet to see: Bank of England rate setters talking about interest rate rises and a cessation of stimulus measures.”

The question of cessation of stimulus measures also overhangs the American greenback. It is vulnerable, he says, explaining that dollar declines ‘are more likely than not’ unless the language from the Federal Reserve Bank hints at increased need for stimulus withdrawal.

(As with stocks, currencies can change during the day and differences may even change before North American market opening.)

A long list of factors has contributed to market volatility this week including the wild swings in crypto currencies. as the week winds down, currencies Bitcoin and other cons continue their volatile price movements and the wild swings of earlier this week may continue today. Bitcoin traded late yesterday at $40,659.18. Dogecoin traded at $0.405. Ethereum sat at $2,822.27.

We do not have enough hindsight yet with this phenomenon to understand it clearly, but the gyrations point up several truths about these currencies:

  1. We do not know at this time the extent to which Tesla chieftain Elon Musk’s tweets and comments will continue affecting coin prices.         
  2. These coins are not currencies in the classical meaning of the word and volatility should be expected.
  3. investors in these currencies do not have the usual tools for judging an investment such as sales outlooks, corporate history and revenue projections. The value of a crypto coin rests solely on what investors are willing to pay for it and if a large segment of investors shift from buying to selling the prices will drop.
  4. Patience and value investing seem to run counter to the crypto currency ethos but some who buy Bitcoin or Dogecoin at its highs may need both. Bitcoin rose to nearly $19,000 in 2017 then dropped back to below $3,300 in 2018. Those who bought at that peak had to wait for three years to be rewarded. Whether history repeats here remains to be seen,
  5. We can accept that digital currency is the future, but there are no guarantees that the existing options will be the leaders, or that current valuations are realistic.
  6. Hope is not a time-honored investment strategy.

This week’s crypto gyrations indirectly underline the place of precious metals like gold and silver as better inflation hedges than the more volatile and less predictable coins. “Gold and silver have been regarded as stores of value for several thousand years as they are attractive, rare and durable and don’t rust or wear down,” says Gavin Graham. London-based financial analyst and media commentator.  

Graham says that all the features that make crypto appealing are naturally inherent in precious metals. However, crypto currencies require computer algorithms and massive amounts of power, resources not required by the metals.

“As a result of their limited supply, precious metals have been regarded as a hedge against inflation which is due to excessive increases in money supply by central banks and governments and the evidence from the 1920’s, 1940’s and 1970’s would support this,” he says.

At the same time, this week’s gyrations also clearly prove crypto’s limitations as a viable currency, Graham says. “The enormous volatility in cryptocurrencies, notably Bitcoin and Ethereum this week, with the former falling almost 30% on Wednesday morning from $40,000 to $30,000 on reports that the Chinese authorities were banning its use for transactions, illustrates their failings as both a replacement for government issued currencies and as investments.”

While traditional currencies can and do swing in value against each other, they are not prone to the extreme volatility of crypto currencies.

When using conventional currency there is an implied acceptance of the store of value in (say) a single dollar and what it can purchase in goods, services or investments. However, this is essentially impossible with crypto currencies because their value changes radically with each swing and there is no means of calculating its inherent value. That means that prices become driven by mass sentiment rather than inherent value. Events of this past week have demonstrated how changeable that sentiment can be, he explains.

The crypto gyrations also highlight some fundamental truths about investors in any asset. Generally, there are three types of investors, according to Paul Bates, capital markets participant and adjunct professor (finance) at McMaster University in Hamilton Ontario.

“At any given moment there are, fundamentally, those that believe the market, or a specific security, is undervalued, fully valued or over-valued,” he says.

“There are, of course, those that don’t care, but just want to ride any wave that seems to have momentum.” Bates says that each player has a time horizon that affects the investment decision.

For everyone, there is the need to find data, or a voice, that offers clarity over ambiguity, at least for their time horizon (which may be minutes).

In other words, each of these players seeks ‘utility’ in information… something on which to make a choice.

That being the case, whether the investment is crypto currency or blue-chip bank shares, the investment decision might be preceded by some honest introspection., Bates says. “Which factors are most critical in your view forward? Perhaps even more important: do you know who you are in this market, in this moment?”

As always, we have a lot to consider in today’s volatile investment environment.

Al Emid is a financial journalist author and broadcaster who does not invest in crypto currencies. His next book. The 2021 Emid Report on Volatility is scheduled for a Fall release.


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