Covid-19 Related Monetary Tsunami's Impact on Bitcoin and Gold Prices

The uncertainties surrounding the evolution of the Covid-19 pandemic and its impact on the global economy are gripping both the people and the markets with fear. A global recession is now the best case outcome also for JP Morgan while Goldman Sachs foresees the possibility of a second great depression.

There are currently few data available. It´s too early to ascertain the
damage inflicted to China´s economy, which is still struggling to
restart after its economic engine province Hubei grinded to a halt after
the city of Wuhan was first put into lockdown on the 23rd of January.
The spreading of the virus seems now under control in China, but the
economical damage still needs to be assessed.

Italy’s lock-down measures are estimated to have hit tourism and transport activity by 90%, retail by 50%, and factory output by 10% with an estimated impact of at least 10–15% of GDP and likely more.

The cure for the globally sick economy

As far the sick global economy is concerned, there is only one possible
cure to avoid a depression. The cure might work, but only if the largest
economies are kept shutdown only partially and for a very limited time.
Otherwise the recession might well turn into a deadly depression. Then,
as Donald Trump tweeted today, “the cure might become worse that the problem itself”.

How long can the world economies resist in that semi-paralyzed state is anyone´s guess. One month, two months?

The cure is the only one that central banks and governments worldwide can administer to the terminally ill patient: a mix of massive fiscal and
monetary stimulus. Basically, more credit creation, more fiat money
debasement and monetary inflation, more QE and this time also
“helicopter” money for the people is coming. The digital presses are already turning wildly at the tune of more than US$ 1 trillion — and this is just the beginning. The ECB promised a new QE package worth at least €ur 750 billion. Germany promised €ur 600 billion, Bayern alone over €ur 50 billion. At least Germany can draw from accumulated current account surpluses for the last 20 years.

As I write the FED announced “unlimited QE” but markets fail to react and fall another 3%.

Deutsche Banks´ Oliver Harvey points out that this is clearly a very different situation from 2008.
The 2008 financial crisis was a shock on the demand side which could be
countered by increasing the liquidity in the system. This time however
we have a supply shock which is morphing into a demand shock. Businesses are closing down not because of lack of demand but because they are forced to. All the consequences of that forced shutdown, such as
bankruptcies, unemployment, spending contraction, will clearly also
affect the demand but at a later stage: “if the government tries to keep spending at levels before lockdowns began, while at the same time keeping lockdowns in place, there will be simply more money chasing after significantly fewer goods and services. The result of this will be inflation, and a lot of it.”

Having acknowledged that and the fact that Deutsche Bank is net positive on gold as an inflation hedge, it is however too early to foresee (i) where
this liquidity tsunami will flow and what the effects could be and (ii)
whether this coming recession might mutate into a depression
which might even trigger a “reset” of the current financial system.
This is also something that one cannot rule out in such a fluid
situation.

Indeed, the world sits on a huge pile of debt. There are no real assets
anymore. Today´s financial assets are someone else´s debts and
liabilities. You name it, government bonds, municipal bonds, corporate
bonds, trillions of mortgages and derivatives of all kinds, the US
dollar, the €uro and all fiat currencies are liabilities. What we call
today money is just a liability and today´s global liabilities dwarf the world GDP by orders of magnitude.

The IMF might have to intervene and issue more SDRs to inject liquidity.
Maybe a global crypto currency backed up by real assets such as gold or
oil will be created? Who knows what might be the outcome if a new Bretton Woods conference is convened to save the world´s finances from the impending collapse.

However — with so many variables and uncertainties — one should focus on trying to keep things as simple as possible. Then, regardless of all the
above, one can be reasonably confident of one thing. Namely that in all
cases the coming monetary tsunami will trigger a huge wave of monetary
inflation and fiat currency debasement.

In this scenario, in different ways, equities, gold and bitcoin will all play a key role in protecting your wealth.

How gold and bitcoin can perform in that scenario?

There was ground to be positive on gold all along, even before the beginning of the crisis. After that, even more so. When referring to gold one should only consider physical gold as an asset. All the rest is just paper gold. Things such as futures, ETFs, unallocated accounts, etc are
liabilities, plus they have a counterparty risk. As I write, gold sits
on the daily timeframe above the 200MA at US$ 1540. Better still in €ur
at 1430 well above the 200MA, still painting a bullish picture despite
the late drop which briefly violated the 200MA.

Gold has been also liquidated in the recent market crashes and not surprisingly. The reasons are well explained by Macrovoices in this podcast
which I recommend you to listen to better understand how the complex
interactions between the liquidity crisis in the eurodollar market and
gold swaps/leases can affect the price of gold in the short term. More
simply, in a liquidity crunch like the current one, who owns gold and
has to meet margin calls on losing positions is forced to sell. Also if
one does not own gold and faces liquidity problems, it can borrow the
gold on the market and sell it without regard to the price in order to
raise liquidity, with the advantage that the lower the price of gold
goes after the sale, the cheaper will be to buy it back later to return
it to the lender while pocketing any positive price difference. Those so
called “gold-pukes” always happen at times where the market is the most
illiquid and cause a cascading effect by triggering stop loss orders at
key levels.

During the 2008 financial crisis — from the days of the Lehman collapse on
September 2008 — gold dropped well over 20%. But when it became clear
that the cure would be a monetary avalanche, QE “whatever it takes”,
gold rallied for over 2 years appreciating from US$ 700 to the
historical high of US$ 1.921 on Sept. 6, 2011.

Also this time, with the coming monetary tsunami, gold will do its dirty job
well and might well set new historical highs. However, lower prices —
if the liquidations and the liquidity crunch persist — cannot be
excluded and they will be excellent buying opportunities.

Now on to bitcoin.

Bitcoin is clearly a much more volatile and speculative asset than gold. It is therefore more correlated to risky assets. As I have expressed in various articles,
it is in my opinion a great store of value but not for every occasion.
It is an effective hedge against monetary debasement and offers
unparalleled protection against confiscation and coercion, it is
portable and it can be easily hidden.

As an example, starting on the 14th November 2018 until 14th December
2018, bitcoin crashed 50% together with equities, while gold was
substantially unaffected. Before the drop, I have warned in this article of the possibility of a further drop in price “because
many funds are deep in the red at this juncture, one can expect that
they will be compelled to liquidate their assets by year end. This could
possibly cause the crypto market to drop lower before it can start
trading higher. Definitely something worth keeping in mind.”

The current drop from US$ 9.000 to 6.200 (-30%) was unexpected also for me, but it did not really surprise me since there are many analogies with
the 2018 drop. Institutional investors — which are now much more
invested in bitcoin than ever before — have been selling everything to
go to cash before repositioning when it will become clearer what will
happen with this crisis.

Now, day after day, it becomes apparent that the only possible response by the authorities — while all the other variables remain unknown — will be to throw enormous amount of digitally printed “money” to the markets.
That´s a good enough reason for me to be very bullish also on bitcoin.

Technically though, the picture has substantially deteriorated specially on the daily timeframe. It would be good to see bitcoin back quickly to the
200MA, around US$ 9.000, and hold that support level on any pullback
before resuming the uptrend.

The fact that the macro environment for bitcoin is very bullish does not
mean that it might not well drop again to the US$ 5000–4000 handle if
the tensions on financial markets persist. I note however that the most
recent price action (on 23rd March 2020), the day in which the FED
announced unlimited QE, seems not to have calmed investors. While the
S&P 500 loses 3% though, BTC/USD is up 10% and gold/USD up 3,6%.
This might mean that weak hands have been shaken out and hodlers/bulls
are back in control.

Binance´s CEO Zhao has explained in this blog post how he sees the situation so far.

One final consideration in favour of bitcoin vs gold in this particular scenario.

Should the spreading of the virus not being quickly contained and should
pervasive global shutdowns not being revoked shortly in matters of
weeks, the risk of a global depression for the largest economies might
become reality.

A depression scenario might trigger a “reset” of the current monetary
system with governments forced to pledge real assets. What those
“assets” would be is yet impossible to say. Maybe more liabilities —
rather than assets — such as IMF SDRs. Or maybe a new global cryptocurrency backed up by real assets such as a commodity portfolio and gold (the crypto version of Keynes´ bancor?)

In all such cases physical gold will be in shortage. Governments might not
have enough and they might have to resort to confiscation like they did
a number of times before in history (see the Table below n. 9 Security/Risks. Table taken from this article here).

If that scenario is clearly bullish for gold — despite the risks of
confiscation — it is even more so for bitcoin which holds additional key
features such as unlimited portability, resiliency to coercion and to
confiscation and can be easily hidden. With border controls, travel bans
and possibly capital controls coming, bitcoin still has unmatched
advantages.

#bianconiandrea #thinkblocktank #cryptocurrency #bitcoin #gold #coronavirus #covid-19 #depression #recession #untitled-inc

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