Morning Brief – Fetters of Gold, Paper and Blockchain

Fetters of Gold, Paper and Blockchain

The Dollar faces a challenge tomorrow when the US Federal Reserve releases its latest monetary policy decision. There are swelling expectations moving into the event that whether realised or undermined should spell considerable movement in the world’s foremost currency. Of course, the impact that the greenback itself has on the valuations of commodity and emerging market currencies as well as its G-10 counterparts means for those with an exposure to the market this story isn’t one to miss.

One of the defining features of the US economic backdrop is the lack of fiscal support and coherence. Politics is still messy and suspected to remain that way until after Biden’s inauguration with Trump and his merry band of lawyers still fighting over the outcome of the election. The US has therefore been denied the smooth transition of power and crucially a leader to build cross-party support necessary to produce meaningful fiscal pledges. Across the rest of the globe – China, the UK and Europe included – there has been an enormous public spending response to the pandemic. Trillions of Pounds have been spent in the name of sustaining economic activity but considerably less per capita in the States.

The next phase of a coronavirus support package is still uncertain. Whilst progress seems to be being made it is at a pace too slow to be relied upon. Yesterday Senate Majority leader Mitch McConnell called for fresh bipartisan support but an insufficient amount seems to be forthcoming. The Federal Reserve are therefore more likely to don their capes and act as Super Powel-er Rangers and seek to single handedly support the US economy. In times of such hyper accommodative monetary policy further action is sure to be USD negative and therefore further action would present a big risk to the Dollar. Some of these expectations for an over-amplified response given the lack of fiscal agreement is starting to be priced into the Dollar that remains at 2-year lows. If the Fed follows this path, there is still enough room to move lower, but if it maintains its current stance not accounting for the lack of fiscal stimulus, the Dollar could appreciate.

Now onto another matter. I normally resist the urge to talk about Bitcoin but something important is brewing that could have ramifications for the wider market. Crypto speculators have begun to discuss the inclusion of Bitcoin and other virtual currencies in the portfolios of major, more traditional investors and have claimed to uncover a more broad usage of the unconventional asset class. Their recent claims that many funds have begun to hold crypto is justifying inflated prices as they claim of a brand new type of demand entering the market. Those same people frequently cite Bitcoin in particular and it’s many variants as a potential safehaven asset, pointing out its positive correlation to Gold and inverse correlation to many fundamental equity moves so far in this turbulent year. That has justified near-record prices and some gold commentators have even stated that should this behaviour continue then the rise of crypto could impact the valuation of Gold and as such commodity currencies (and even the Dollar).

Digital currencies are a great idea in theory. They offer a potential new toolkit for economic and monetary management, lower transaction costs, consumer security against fraud and other key possibilities. But Bitcoin, Ethereum, Lite coin, and for that matter any other virtual coin you can name doesn’t harness that potential. They’re zero yielding, obscure, worthless bubbles that cannot and should not amount to a meaningful currency or medium of exchange. The very fundamental driving the rise of Crypto and the perceived threat to gold then is more likely to be a bubble that pushes money back into tried and tested havens including gold the Yen and the Dollar. The potential stockpile of bitcoin worth the best part of half a trillion US Dollars at today’s valuations, could seek value leak, in fact surge, into these more traditional havens once the bubble bursts.

Discussion and Analysis by Charles Porter

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