What next for bitcoin? The path of gold in the 1970s may hold the answer, strategist says
Cryptocurrency, the market that never sleeps, is once again grabbing the attention of investors.
Bitcoin BTCUSD,
Our call of the day comes from Michael O’Rourke, chief market strategist at JonesTrading, who says gold’s “speculative” gains in the 1970s may offer investors an insight into the future path of bitcoin.
Bitcoin’s rally, climbing 500% from October to its April peak is “easily one of the most historic bull runs in financial history,” O’Rourke said in a note on Sunday, adding that the rally was driven by a lack of trust in federal governments and their spending practices.
The path of gold GC00,
He noted that it was also a time of distrust in the government and of high inflation — three or four times current levels. Then in 1971 President Richard Nixon ended the fixed exchange rate for gold of $35 per ounce. After going nowhere for four decades, gold surged and by January 1980 it had hit $850 per ounce.
“Subsequently, history has proven that a large portion of gold’s move in the 1970s and early 1980s [was] simply speculative,” O’Rourke said. Gold plummeted below $300 per ounce later in the 1980s. It wouldn’t climb back above $850 until 2008, as O’Rourke notes investors came back to gold during the financial crisis for the same reasons — central banks printing and dysfunctional governments. The commodity’s 45% decline from its 2011 peak to its 2016 trough, opened the door for bitcoin to take over as the “new proxy for dysfunctional governments and central banks,” he said.
The “novelty” of gold’s re-engagement with market dynamics in the 1970s environment created a “perfect storm of positivity for the asset.” The same novelty provided bitcoin with a similar story line for “speculators to embrace amidst the pandemic fears” and fiscal and monetary stimulus, he added.
So where does that leave bitcoin?
O’Rourke cited Warren Buffett’s comments on gold when it was peaking in 2011, as he warned against “assets that will never produce anything,” but are purchased in the hope that someone else will pay more for it in the future. That summary “almost perfectly matches what we have witnessed from bitcoin over the past seven months,” the JonesTrading strategist said.
“Gold still has a couple of millennia of history as a store value going for it, bitcoin’s environmental drawbacks should prove too large to overcome. The ESG [environmental, social and corporate governance] concerns have reversed the cryptocurrency just as the feared inflation is materializing,” he added.
The tweet
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