BITCOIN, GOLD AND OTHER MUSINGS...
2016-12-13 6pm EDT | #bitcoin #gold #China
China already restricts the exporting of gold, but recently has also taken the unusual step of restricting the importing of gold. The Chinese government is desperately trying to staunch the outflow of capital leaving the country, and clamping down on the importing of gold is just one of the many newly added tightened capital controls. Other measures include restricting foreign mergers by Chinese companies and reducing non-Chinese real estate purchases by individuals.
It is ironic that Donald Trump is threatening to label China a currency manipulator. Maybe ten years ago the US had an argument that China was purposely keeping the value of the Yuan artificially low, but with the massive increase in the value of the US dollar over the past few years, and due to China’s previous loose peg to the greenback, the value of the Yuan has soared.
There is no doubt that during the early 2000’s China purposely pegged their currency artificially low. As their economy matured, the Chinese allowed the peg to march down from around 8 CNY/USD to 6. The problem arose in late 2014 when the US dollar began its massive bull run. China desperately tried to hang on to their peg against the US dollar, but as the greenback continued to appreciate, China found its currency gaining 30% against its partners on trade weighted basis. Although the CNY/USD rate had stopped appreciating in any meaningful way, the Yuan strength was massive.
Finally in mid 2015 the Chinese government cried uncle and depegged against the American dollar and announced they would be managing their currency against a basket of currencies.
The problem is that the Yuan is still too high. Capital is flowing out of China at a fierce rate. The Yuan needs to be lower, but the Chinese government is taking a measured approach. They are walking down the CNY rate against most currencies, with the both the CNY/USD and the trade weighted dollar depreciating over the past year. Yet it is not fast enough.
Many Chinese individuals with the means are buying foreign assets in an attempt to protect their wealth. Houses in Vancouver or Sydney, overseas companies, copper stockpiles - whatever they can scoop up. And it makes sense. If your currency is overvalued, what is the logical thing to do? Buy stuff with it!
However China is not an open economy. The government maintains strict capital controls on many aspects of the economy. Although Chinese individuals know their currency is overvalued, the government can simply clamp down on the means at which they attempt to profit from that overvaluation.
Human beings are resourceful creatures, so they dream up many different ways to preserve their wealth. Who would have ever thought Vancouver real estate would turn into the world’s greatest money laundering scheme?
But although I shake my head at the stupidity of paying $4 million bucks for a house in Kits (seriously? do the Chinese ever visit Vancouver in winter? It rains for 100 days straight sometimes… sorry couldn’t resist - my Toronto/Vancouver rivalry is bubbling up - see postscript for my favourite Vancouver joke), I am even more flabbergasted at buying bitcoin as a method of preserving wealth.
Now before you label me as some Luddite who doesn’t understand the “genius” of bitcoin, let me assure you - I know all the arguments. We were mining bitcoin when it was still trading in double digits. Eventually we had to move all of our specialized computers to my business partner’s garage because it was turning our office into a sauna. We created automated arbitrage routines to take advantage of the different prices between exchanges. Heck, we even looked into buying a vending machine that allowed people to buy bitcoin. Although you can colour me a bitcoin skeptic, I understand it better than most.
While most bitcoin bulls are busy attributing the recent price rise to the world’s realization of the “transformative” power of the technology, I instead present the following chart:
Bitcoin has become nothing more than a vehicle for Chinese individuals to get capital out of China.
Between my Vancouver joke and now my deriding bitcoin as nothing but a money laundering tool, I am sure to piss some readers, but I don’t care. It doesn’t take a genius to see the relationship between the price of CNY and bitcoin. You would have to have your head in the sand to not realize the Chinese are using it as a vehicle to skirt capital controls.
Although I am hesitant to put any portion of my wealth into a bunch of bits within a network, so far my skepticism has only cost me. While I cling to my precious yellow rock, the governments have managed to keep any sort of enthusiasm for gold quelled. If you had told me that India would eliminate a large portion of their cash currency overnight and China’s currency was being kept aloft at an artificially high level, I would have guessed it would be the perfect environment for the world’s longest running store of value to have an giant uptick.
Yet, the opposite has occurred. Have a look at the chart of gold, and its new nememis - bitcoin.
For a while it looked like the two “safety” assets moved together. But since this summer, they have diverged.
If we take this period of divergence and look more closely, it appears they have almost become negatively correlated. Here is the past half a year with the gold price reversed (higher on chart means lower gold price).
Yesterday I highlighted how all these financial assets are tied together in one big correlation. My suspicion is that gold is being jerked around in this twisted financial web.
Bitcoin is not tied down by this same Central Bank madness. The elites haven’t yet bothered with bitcoin, so there is nothing stopping it from running freely.
I had this great discussion with my buddy the other day about the problem with gold. He was convinced the Chinese were keeping the price low so they could accumulate a large enough position for when the inevitable financial system reset occurred.
I am not sure if the Chinese have such an overtly nefarious plan. I tend to think government officials of all stripes operate more on a “just get through the immediate future” basis, but if there was ever a government with a long term plan, then it would be the Chinese.
The purpose of this post is not to inundate you with more gold conspiracy theories. I don’t ever use that as an excuse for picking the wrong trade. I should have plugged my nose and bought bitcoin instead of gold, but I didn’t, and making excuses only makes me look like an even bigger mope.
But I did want to emphasize that one of these days, the elites will lose control of the system. The amount of Central Bank activity is off the charts. And although they have managed to keep the wheels on the bus turning, they will eventually fall off. When that happens, there will only be one real asset to own.
I am not fussed that no one is coming for the gold today. Just like everyone thought bonds could never go down only six months ago, sometimes it takes time. The scramble into bitcoin is only a small example of what will happen when governments try to too tightly control the Frankenstein system they have created.
As I write this I realize I am beginning to sound more and more like a nutter. Yet don’t misread me as some sort of yelling-at-the-birds old man that is stuffing gold bars under his mattress. I acknowledge that right now, the stock market is screaming higher and gold is sucking wind.
But at the very least, into this madness, think about peeling off a little bit of equities and putting it into the oldest form of money out there…
Thanks for reading,
PS: World’s best Vancouver joke
An observant woman died one day, and found herself waiting in the long line for judgment.
As she stood there, she noticed that some souls were allowed to march right through the pearly gates into heaven. Others, though, were led over to Satan, who threw them into the burning pit. But every so often, instead of hurling a poor soul into the fire, Satan would toss a soul into a small pile off to one side.
After watching Satan do this several times, the woman’s curiosity got the best of her. So she strolled over to find out what the devil he was doing. “Excuse me, Prince of Darkness,” she said. “I’m waiting my turn for judgment, but I couldn’t help wondering, why are you tossing those people aside instead of flinging them into the fires of hell with the others?”
“Ah, those…” Satan said with a groan. “They’re all from Vancouver, they’re too wet to burn!”