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It was just two days ago, that we wrote about last week’s slide in the silver price from around $24, to around $22.50. Well, yesterday and today the price ascended back to around $24.
The question is whether silver is now just as scarce as it was, scarcer, or more abundant? Read on…
But First, Bitcoin
First, we want to touch on what has been happening in the world of bitcoin. We will even break our preference to criticize it only when it’s skyrocketing (the basis of most criticism of bitcoin—or gold and silver—is when the price drops).
Within a period of about 17 hours, bitcoin dropped about $1,500. Prior to that it was skyrocketing. It had been on quite a tear, just about doubling from its low on September 7.
Just imagine if your mortgage doubled! You’re going along, paying about $1,500 a month in September. And boom, before Christmas, you’re now paying $2,900. Could you stay in your home? We can’t answer that without knowing more about your financial situation. However, if it’s not a mortgage on a house, but instead a loan to finance growth of your business, then we are quite confident. Virtually all businesses would default. Few make such a high return on capital that they could survive a doubling of their monthly payment.
Bad for Borrowers
Bitcoin is unsuitable to borrowing, other than to finance a bitcoin “mining” system (an amusing term). If you finance anything from hamburgers to a real mine such as gold or copper, forget about borrowing bitcoin. This is not a hidden flaw. Nor is it something we say to promote gold. This is precisely what bitcoin proponents promise you will happen. The very same people who tell you it’s money openly admit it has a property that makes it suicide to borrow.
That same property, which makes it unsuited to debtors—i.e. bad to have on the liability side of the balance sheet—is attractive on the asset side. So people buy it because it’s going up. And some people did buy it, that fateful minute 1,155 minutes ago. They paid $19,845. Then just 1,035 short minutes later, they sold it for $18,356. A loss of $1,489, or 7.5%.
One might quibble, and demand how we know someone paid $19,845. Well, that’s just how markets work. That was the price on our screen, which means someone bid it up to that level.
The next quibble is to say that probably the people who paid that much did not sell 17 hours and fifteen minutes later. But these bitcoin-advocates-at-all-costs are hoisted by their own petards. Bitcoin, they contend, is money! In their definition, money means a medium of exchange. This means that people are supposed to be using it for, you know, exchanges. Real goods and labor are presumably trading for bitcoin constantly. So, yes, we assert that if the bitcoiners are correct, there are people who lost 7.5% in 17 hours.
Bad for Savers
This makes bitcoin unsuitable for the asset side of the ledger for conservative balance sheets. Such as savers. Would even the bitcoin diehards recommend their widowed grandmother put 100% of her life savings into bitcoin?
Without savers or borrowers, this alleged money is not used for financing productive activity. It is not useful for finance, as it is unsuited to both savers and entrepreneurs.
This leads us to an underappreciated characteristic of the dollar. Many wonder why the dollar is as stable as it is, being subject to the abuse by its manager that it is. Every debtor makes a relentless bid on the dollar. They are dumping every product they can make, every service they can provide, on the bid price. They must raise dollar cash to service their debts, or else their creditors will foreclose on their businesses and homes. One should not underestimate how this supports the value of the dollar (especially to those who measure it in terms of its purchasing power).
Bitcoin lacks this mechanism (or any) to stabilize its value. It has only a mechanism to stabilize its quantity. It’s a strong mechanism (other than the perverse incentive that may grow to undermine it one day). However, value is not proportional to quantity. It just isn’t. As bitcoin’s daily volatility proves every day.
Medium of Exchange? Nope.
If it cannot be used for finance, if it is unsuited to borrower and lender alike, then what is it used for? Some would contend it is used as a medium of exchange. After all, some merchants do accept it. Let’s look at that.
Few merchants make so much profit margin, that they can take the risk of a 7.5% loss in less than a day. They just want to be paid in dollars. They know the wholesale price that they pay the distributor for the goods. And they add in a (small) profit. That is their selling price.
They hire a third-party currency exchange (TPCE). The TPCE converts the merchant’s dollar prices to bitcoin, and adds on a fee. When a buyer comes along with bitcoin to buy a product, the TPCE finds a fourth party who wants to trade dollars for bitcoin. The TPCE brokers the dollars from the fourth party, the bitcoin from the buyer, and the goods from the vendor. In the end, the vendor has dollars, the buyer has the goods, the fourth party has the bitcoin, and the TPCE has its fee. Everyone gets what he wants.
Is this truly using bitcoin as a medium of exchange? Not quite. It is using bitcoin as a means of speculation. The reason why the buyer wants to spend bitcoin—and why he is willing to pay the TPCE’s fee on top of the price of the goods—is that he bought bitcoin a month or two ago. At a much lower price.
In fact, usage of bitcoin in online transactions is closely correlated to the price action.
Medium of exchange? Hardly. Medium of speculation (and of capital consumption).
Is bitcoin money? No, bitcoin is not money and it’s not sound.
Checking the Fundamentals
Now on to gold. Here’s the graph.
Early last week, the price was around $1,875 and the basis around 0.7%. Then they fell to $1,780 and 0.3%. By the end of Tuesday, the price was up to $1,815 and the basis to 0.7%. The abundance of gold to the market is basically the same, now at $1,815 as then at $1,875. That is not what you want to see, if you’re speculating on the gold price.
Now, the silver graph.
Unlike gold, the price of silver is back up to what it was at the start of last week. The basis was 1.75% at that time. Now, it’s under 1.6%. So unlike gold, silver is slightly scarcer and it’s back to the same price.
Does this signify a further drop in the gold silver ratio, reverting it back closer to its long-term mean (no, we don’t refer to the historical ratio of 16, but the postwar level around 50)? This will bear further watching.
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You say bitcoin is an irredeemable currency. I don’t think that concept applies to bitcoin.
Why is being redeemable a good thing? To protect from inflation or default.
Bitcoin is a deflationary currency and has no counterparty risk.
Redeemability is therefore irrelevant.
“it is years away in the United States”
You might be right, but how can you be sure of this?
JR: It’s a tricky thing and no guarantees. :-/
That’s what I thought you would say.
You also say “It’s madness”. Yes it is…. madness to attempt to measure madness.
I concede that gold may be in backwardation when the madness finally ends but that doesn’t explain the madness, nor how long the madness will last, or mad the madness will ultimately be.
I find it interesting that a child of the Internet age such as yourself objects to the intangible value that can be abstractly represented in the BTC.
Do you not see the value of a new piece of software? Even though it is intangible in form and for the most part a representation of an idea via computer code, just ask Bill Gates if windows is tangible. I think it may be the same with BTC. Intangible yes, but solving problems and helping the little man to throw off his yoke even though it is intangible, maybe. The market seems to be saying that it does something well. Maybe just giving people a chance at having money out of the hands of bankers and governments is that valuable. Sad to me that people have not recognized the exact same attributes in the precious metals in quite the same way.
tyonker, measuring the value of something is not the same as saying something has value.
tyonker: if you follow my commentary from my first video on bitcoin, I state explicitly that I think it’s cool technology that enables commerce that would otherwise be impossible. It is a currency with some desirable features that are not available with any other currency.
That said it is irredeemable currency, not money. This is not saying that it has no value, it is saying that it is not a commodity.
I would disagree that software is indeed a tangible thing. It goes into a computer, laptop, tablet or smartphone which enables its user to utilize this device to support a variety of businesses, functions for services, production or consultation.
As usual, I never come to this site without learning some new nuggets from Keith and sometimes its commentators.
This quote is magnificent:
“…then he can see that all the credit in the system must inevitably and inexorably crash to earth like too many rocks impossibly kept aloft for a while by a juggler who exceeds his limited skill.”
AGREED!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
then there is this
http://www.businessinsider.com/texas-family-we-sold-this-porsche-last-night-for-300-bitcoins-2013-4
tangible enough for some
Sorry for being off topic.
I would love to buy physical gold, but i live in an unsafe area and vunerable to theft. I see the writing on the wall about the US dollar and the only way i can protect myself is with IAU eft in my 401k.
I know this is not the same, but its all i can do. Im worried but i dont know what else to do, so i put 50 percent in IAU and hope for the best.
Well put, Keith. Excellent analysis.