Market turmoil has intensified in February, and many analysts are predicting that the Fed may make a U-turn on their rates hike decision. In the flight to safety, Gold has extended its rally while Bitcoin looks to be going to ground. This week’s edition of Global Economic Outlook looks at the gold, bitcoin and US dollar charts.
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In This Week’s Calendar
Mon 8 February
Japan M2 Money Stock y/y (expected: 3.1% previous: 3.0%)
Tue 9 February
Japan 30-y Bond Auction
Wed 10 February
US Crude Oil Inventories (previous: 7.8M)
US Fed Chair Yellen Testifies
Thu 11 February
US Unemployment Claims (expected: 287K previous: 285K)
Fri 12 February
US Core Retail Sales m/m (expected: 0.0% previous: -0.1%)
Making The News
Gold has been in a long-term bear market since 2011 when it struck a top just below $2,000/oz. An advance from its December 2015 low, was cynically regarded as just another upward correction prior to additional decline, but surprisingly gold just kept going. Bitcoin has suffered the opposite fate. After making a 2015 high in November, bitcoin price reattempted $500, and has been declining ever since.
As market uncertainty became market fear at the close of 2015, gold began a surreptitious rally.
While nearly $8 trillion was wiped off world equities in January, the gold price was climbing its familiar path back up inside a down-sloping channel. Analysts, having repeatedly failed to call a bottom for the past two years, dismissed the rise as yet another corrective advance doomed to end in yet another low.
The advance was imperceptibly accelerating throughout January until, on February 4, gold unexpectedly broke above $1,440, and a resistance trendline dating back to 2013.
Gold 1-Week Candle Chart
Subsequent price action was exuberant, and after an obligatory retest of the resistance level price quickly rallied to $1,174.
Gold XAU/USD 4-Hour Candle Chart
A standard Fibonacci extension tool shows gold potentially targeting $1,200 for its first wave of advance. Wherever the wave top eventually prints, it can be expected that the market will retrace 50-60% of the rally in the coming months before advance resumes.
In a strange twist Bitcoin (aka Gold 2.0) has not been embraced as a safe haven by investors. Despite a steady deterioration in global economic indicators, during 2016, the block chain flagship has flagged – declining from $465 to $352 in January.
Bitcoin price had declined by $103 compared to gold’s $130 rise during the same period.
Bitstamp BTC/USD 4-Hour Candle Chart
Despite a surge in mainly positive mainstream news coverage, unfortunately, it looks like bitcoin price will continue decline in the coming months.
Fundamental concerns such as populist consensus breaches by former developers, ideological disagreements about Bitcoin’s financial role, and differences in defining the critical terms “consensus” and “decentralized” have all contributed to a schism that divides the ecosystem.
All-or-nothing disagreement, factionalism and emotive leadership are symptoms of negative mood in the Bitcoin ecosystem, and predominantly negative mood manifests as selling behavior in the market.
After a spectacular recovery rally during 2014, the US dollar index has been bubbling under 100 points for most of 2015, and was sold sharply lower during February. However, the outlook of a stronger dollar does not change.
The dollar has, since 1913, been tethered to Federal Reserve policy. The Fed is also the first central bank to tighten amidst global central bank easing. For this reason, as explained in previous GEO articles, and expanded on below, the US dollar can be expected to strengthen over the course of the next several years.
The Fed is tightening monetary policy via two actions:
a) cessation of quantitative easing (credit conjuration), which halted US dollar inflation
b) reducing credit availability by increasing interest rates
The outcome is that the Fed is deflating money supply which puts constant upward lift on the value of the dollar, in general, and the cash note dollar, specifically.
The rest of the global central banks are easing monetary policy by stepping up their quantitative easing and by lowering interest rates. The outcome of their monetary policy indirectly strengthens the US dollar, particularly devaluation of major Dollar Basket components the euro and yen.
Some argue that the Fed will reverse their rates hike policy and employ NIRP (negative interest rates). This is arguable and speculative, but is unlikely to reverse the dollar’s path of strengthening – credit deflation, which has been the elephant in the room for 4 decades, is surely the stronger influence on forex dollar value.
With the bulk of the planet’s debt denominated in US dollar, and most of it held by entities who are either based in the US, or US subsidiaries abroad, it is easy to see what happens to the value of cash money (dollar notes) when the credit money (US dollar denominated debt) evaporates:
Money supply = physical cash + credit
Deflating the money supply by squeezing (or losing) the credit, increases the value of each unit of money that remains. US dollar denominated debt defaults, anywhere in the world, will therefore lead back to US banks and ultimately to the Fed, so any reduction (or destruction) of dollar-based credit will cause the dollar to strengthen.
A paradoxical outcome, but self-evident when analyzed with the correct understanding that money supply is comprised of both cash in circulation, as well as, credit.
This analysis is provided by xbt.social.
Global Economic Outlook is published every Monday on CCN.LA Readers can follow Bitcoin price analysis updates every day on CCN.LA
The writer trades Bitcoin. Trade and Investment is risky and subject to probability and market changes. CCN.LA accepts no liability for losses incurred as a result of anything written in this report.
Charts from TradingView, financial data cartoon from Investing.com, image from Shutterstock.