Trader Note

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2018-01-22 Week

Gold - Crypto is Modern Bearer Bonds - China & Bitcoin


This Week

The BOJ will lead the moves early in the week. Big changes to policy may start pushing hard on the bond market. That could be a catalyst for pain across the bond space, which will flow over into other markets.

Latter, the ECB gets a chance to scare markets. If they don't have a clear plan for Brexit and bond buying, markets may feel it hard.



What are the chances that the stock market will make it through the year without a pullback (massive dip)?

Stocks have been on a parabolic rise. Every trader knows that such moves are followed by dips. The challenge is to profit from such dips. So selling early and moving into cash is one way to be ready for a dip. Some traders have been waiting for a long time while sitting on cash, but that patience will soon be rewarded.

The problem with sitting on cash is that as governments print money, they are devaluing that cash. An alternative to cash is crypto currencies and gold. Both are outside of government money printing.

Gold has performed well lately. Some of the 'anti-government' money that was invested in crypto currencies is moving away from those markets and back into gold. This gold buying is mostly a hedge as crypto traders try to secure profits. Expect this move to continue because those that like Bitcoin for the anti-establishment nature are unlikely to be buying government issued bonds.

Gold always performs well when there is fear of government collapse. The EU is still struggling to figure out what will happen with Brexit. They are struggling to prop up weaker governments that are still drowning in debt. The USA isn't faring much better as state and cities struggle to find enough revenue to pay interest on their bonds. Failing infrastructure won't be fixed quickly, and left to fail will cost ten times what it should. With such massive debt, mediocre manufacturing and degraded systems, the USA will be unlikely to cover its debt any time soon. Buyers of such debt have decided to curtail purchase, which basically means that the credit of the USA is not being extended. That does not bode well for US dollars as an asset.

A high interest rates, a falling dollar and dropping stock market will make it a great time to be buying gold.


Crypto Currencies Are Modern Bearer Bonds

There are some great films that use bearer bonds, for example: Die Hard, Beverly Hills Cop, and Panic Room. In these films, criminals wanted the bearer bonds because they act like cash without the bulk of bills. In the modern world, crypto currency has taken on a similar role. Unlike the films, now hackers are stealing $50 million and more from exchanges… which would have made for a very boring Die Hard film.

Many people don't understand crypto-currencies but they are very similar to bearer bonds. Back in the 1980s, bearer bonds were a way to transfer large amounts of wealth without going through a bank or government. They were bonds issued without a name and interest paid to whoever submitted the coupon (often a punch hole or removable strip on the bond). These bonds were often issued in amounts much greater than currency available ($50K instead of $100 note) which made them an easy way to transport large amounts of wealth. They also weighed less than the equivalent gold value.

Crypto currencies function in a similar manner to bearer bonds. Crypto currencies hide wealth from governments and tax men. They are easily transmitted around the world. They don't weigh anything. Cryptos are the ultimate in liquid positions and convertibility, more so than bearer bonds ever could manage. The people that would have been stocking up on bearer bonds are now deep into crypt markets.

Recently cryptos have taken a dip. This is a brief pullback on speculative demand trying to find the next big thing. This will likely be a momentary pullback on a longer run higher.

The real reason to hold bitcoin remains the same: Lack of faith in governments, ease of movement of wealth, distrust of banks, and fear of market solvency failures.

Nothing has changed in the market. Banks are still overextended and likely to fail. Governments will have to bail out the banks through money printing - how did that work out for Zimbabwe and Venezuela? Bond markets are having issues and stocks are a high-risk of a correction. So, bitcoin and other crypto currencies are still a BUY.


Bitcoin & China

China and Korea are attempting to regulate the crypto currency space. This is an attempt to stifle ICOs and crypto currencies that are new. This is NOT an attempt to stop bitcoin, but an attempt to limit the bitcoin competition.

For Korea, this crackdown is an attempt to ensure taxation. In Korea, markets move fast because many people are trading. Crypto markets are just an extension of an existing tech literate, heavy trading population. So do not expect that any stifling regulation will pass, and governments will be unable to stop the Korean crypto traders.

China has more of an interest in bitcoin than any other country in the world, especially from an infrastructure standpoint. China has some of the most massive bitcoin servers in the world. Huge amount of money are generated through mining of crypto in China. So there is no financial incentive for stifling growth of this industry.

China has huge amounts of hidden wealth. Much of that dark money has fled China for overseas investment (like the Australian housing market). The easiest way for that money to move is through crypto currencies. Although the government wants to control the flow of that dark money, individuals within the system have a vested interest to ensure that crypto is accessible.

China has a massive stockpile of currency from most countries in the world due to trade deficits. One way to move out of those currencies is to find an intermediary investment that allows them to exit without crashing the currency that they are holding. This is why China has invested in farmland in Africa and Australia (they know food security is important) as well as bought gold and oil. This is also why they are investing in crypto currencies. Holding crypto is just a liquid currency that allows them to hedge a massive fiat position. So when you hear that china is cracking down on ICOs, realize that it is to protect their own bitcoin position.

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