The Crypto Signal for the Precious Metals Market

What if bitcoin just topped? What does it change for the price of gold going forward, if anything?

Many years ago, people wanted to buy gold but didn’t really want to store it in their homes, pay for safekeeping and insurance during transport, and so on. The demand gap was filled by all sorts of e-gold, e-bullion, and overall pooled accounts. This idea might seem odd to those, who are new to the precious metals market, and writing about it does make me recall that scene from the Lord of the Rings movie.

• “I was there, Gandalf, 3000 years ago…”

Says Elrond, while describing the weakness of men and how it contributed to Middle Earth’s status quo.

So, yes, I was there when e-gold was gaining popularity. Whether there really was any physical gold backing up those e-gold accounts (and not just hedges through futures contracts) remains unclear. The uncompromising analysts claimed that unless you hold it in your hand, it’s just “paper gold” and not a real thing that would provide protection in case of severe financial turmoil. Some said that as long as you have the serial numbers of the exact bars that you own, it most likely exists and provides real protection.

Then came the ETFs – GLD was launched in 2004, and SLV was launched in 2006 (triggering a local collapse of silver prices, puzzling many who were not aware of the buy-the-rumor-sell-the-fact type of reaction on the market).

The debate about whether they are backed by physical metal continues. And the more evidence (“evidence”?) one side (believers / those, who doubt those metals’ existence) provides, the more backlash it generates on the other side.

On a side note, there are some ETFs that allow for in-kind redemption of physical metals (like, you can go there and pick up the bars), which pretty much implies that they have to be there, which might be the sweet spot for those willing to balance convenience with security.

And just when it seemed that the situation in the case of the fiat currency alternatives and the means through which one could own them is stable…

Cryptocurrencies arrived, and they completely changed the landscape.

At first, it was just bitcoin, but it was soon joined by others.

To be honest, I did hear about it many years before it got popular, but I just shrugged it off as something rather uninteresting. And I ignored my hunch to buy some, just in case. Lesson learned – having a hunch is important, and so is knowing about something way before others (and trusting that insight). Sometimes, the market and investors creating it are so much in denial of something that is about to become huge that those “unclear periods” take much more time than they should (looking at it objectively).

Remember the very early part of the pandemic? Looking back with the benefit of hindsight, it was kind of obvious that most of the things that happened would happen, but it was just too easy to ignore it.

Precious Metals and the Arrival of Cryptos

When cryptos arrived, they were like the new, cool kid in the neighborhood. The future finally arrived! True alternative to the dollar, euro, yen, and other fiat currencies that is not bulky. And it had this “futuristic” vibe to it.

Just like gold and mining stocks, but cooler, with more potential.

Or so it seemed.

The precious metals market and cryptocurrency market became more and more similar over time. Not fundamentally, but through investors’ perception.

Bitcoin was the flagship metal with a big price tag per unit – just like gold (and its price).

Ethereum became the more useful (smart contracts) counterpart that was still cheaper in nominal terms – just like silver (and its multiple industrial uses, smaller stockpiles and so on).

Finally, there were many altcoins (*cough* shitcoins *cough*) that promised quick riches – just like junior mining stocks. Some of those altcoins provided massive gains, just like some junior miners that found a rich deposit. And some altcoins just wasted all invested capital, just like some junior miners that filed for bankruptcy protection.

At first, there were bigger differences in their price moves. They reacted adversely to USD Index’s movement (well, they were alternatives to fiat currencies, so it’s no wonder that this was the case), but in somewhat different ways. However, over time, those differences started to fade away.

Gold, Silver, Miners, and Bitcoin - Technicals

Nowadays, it seems that the cryptocurrency market and the precious metals market are quite synchronized.

Please take a look at the below chart for details.

The upper part is bitcoin, and the lower part is gold (orange), silver (well, silver), and the HUI Index – proxy for gold stocks (brown).

The last time bitcoin and PMs moved differently was in early 2022. Back then, gold, silver, and mining stocks moved higher in a visible manner, while bitcoin moved higher very modestly.

Bitcoin’s performance back then is understandable – it was after a double-top and it didn’t have the strength to rally one more time.

Anyway, since that time, both markets: precious metals and cryptocurrencies moved in a rather synchronized manner.

Namely, after the early-2022 top, they all fell together.

Bitcoin topped above $60k (actually, I wrote about the top being in or at hand when bitcoin was trading close to $50k) and it declined to $15k. That’s when I wrote that it was bottoming – and indeed. It started to rally from those levels.

By the way, do you remember how bearish everyone was at that time? It was very interesting to once again see how excessive bearishness is actually bullish, and vice versa. When bitcoin was above $50k, everyone and there brother were in the “todamoon!” mode.

While bitcoin was declining and then correcting, the same thing happened on the precious metals market. And out of the above-mentioned trio: gold, silver, and mining stocks, the latter’s price movement was most in tune with what happened to the bitcoin price.

A Warning For Investors

This brings me to the reply to the unasked question:

Why am I writing about the bitcoin market in today’s analysis of the precious metals sector?

The point is that something really important happened in the bitcoin market, and I wanted to build the foundation for the technical link between the two markets. It’s not coincidental that they moved together – it has a lot of sense on the fundamental level.

This, in turn, means that indications coming from the bitcoin market are likely to translate into the outlook for the precious metals market as well – in particular into the outlook for mining stocks.

So, what is the bitcoin chart saying right now?

It’s saying “hey, my rebound is probably complete, and I’m about to slide”.

If you look at the chart, you’ll notice that bitcoin moved to the dashed line and then moved back down. This line is based on the previous 2021 low in terms of the weekly closing prices. Bitcoin recently moved above the 2021 lows in intraday terms, but it didn’t move above it in weekly closing price terms. As weekly closes are generally more important than intraday price extremes, the breakdown below those levels was just verified.

This means that the top in bitcoin is most likely in. Especially that in nominal terms, the price doubled from its recent low. Markets (not just precious metals and stocks, this applies to other markets, like forex and crude oil, copper, and other commodities, too) tend to like those round numbers - this applies not only to price levels, but also levels based on performance. And speaking of round numbers, The $30k level that bitcoin reached recently is a very round number, as well.

The above makes sense also from the fundamental point of view. The CBDCs (central bank digital currencies) a.k.a. gov’t cryptos are starting to take a real shape. And if the governments and monetary authorities want to impose using their own cryptos, it will be rather easy for them to outright ban or tax the use of other cryptos like bitcoin. This risk is rising, which means that the appeal for cryptos is likely to wane.

Actually, that’s the key problem I always saw with bitcoin. When it becomes so big that it threatens the monetary status quo, the Powers That Be are unlikely to give away their monetary power just like that. Wars were waged for that… Moving toward CBDCs means that they accepted that something will have to change, but that they still want to retain control within that change (or use this as an opportunity to increase it).

So, as bitcoin declines again, the precious metals are likely to decline as well, and mining stocks are likely to be affected to the greatest extent.

Looking at the bottom of the chart reveals that gold stocks’ performance was truly weak recently compared to the one of gold. And when bitcoin slides, this is likely to be magnified. Those, who are positioned to take advantage of those moves are likely to be rewarded extremely well.

And just like it seemed unlikely that cryptos would rally at all, and then plunge from $60k (and then double from $15k), the “unlikely” slide of the precious metals and – in particular – mining stocks is likely to take many by surprise. You have been warned.

Przemyslaw K. Radomski, CFA

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