Mine Digital Exchange: Q1, 2020 [Report]

For those who are not aware – the gold to silver ratio is a historic comparison used as far back as Roman times (at 12:1) to determine the value of money (currency). The ratio had been highly important to the fortunes of Spain with their South American Gold, China with its Silver demand and Britain over the years.

The Numbers, The Events, BTC, ETH, Gold v Silver, Gold v $, S&P 500

Today is the end of Q1 2020 and ladies and gentlemen, what a doozy.

The Numbers

Bitcoin is down 16% for the year after rallying 58% and falling as much as 62% from its highs. The asset has moved 126% of its starting value taken in straight lines.

Ethereum is only down 2.3% today but has moved 271% this year.

The Vix index is up 222 % for the year.

Orange Juice is up 19.09% (Vitamin C?)

Crude oil is down 66 %

The Russell 2000 is down 30.84%

The S & P 500 is down 19% for the year (was almost 40% from highs)

Silver is down 21% while Gold is up 8%.

The Events

We entered 2020 with the repo market liquidity crises hanging over global market. That $500 billion USD was necessary for the repo markets was a bad omen headed into the new year.

Things did not improve with tension in the middle east, first the US withdrew from Syria, Saudi oil installations had been attacked and there was a tightening noose around Israel as Russian and Chinese influence grew in the region, symbolised in joint naval exercises in the region a couple of weeks before the second most powerful man in Iran was assassinated by a US air strike.

This new US foreign policy tool was already a real game changer.

In trade the US leaned heavily on China to draw a trade deal out of them in which the US appeared to have done very well.

Somehow a single issue – the coronavirus – has made the rest of these look pedestrian by comparison.

The world has not been faced with a challenge like this for a very long time and it is the perfect bogeyman – unseeable, uncontrollable, with no respect for social or cultural values or any other rules or laws people try to enforce on each other. It is estimated that between 40-70% of us will end up with the virus at some point.

And so of course people are apoplectic about it.

A global recession was already likely beforehand, now a global depression is being considered.

The solution is more of the problem – wild expansion of the monetary supply that makes those couple of billion dollars from LTCM that threatened to shut down global finance look a pittance.

Systematic risk has a new face.

With this going on, the oil price today is $20, $20 below the reported break-even price of US Shale Oil producers ($40) because of Saudi flooding the market. Oil had been heavily debt-financed as part of an America first strategy that would see the nation secure energy independence under President Trump. Indeed, the US became a net exporter in 2020.

With the US Energy Information Administration estimating that 7.7 million barrels of oil a day are produced via shale, this represents $154 million a day of cash that producers are not getting – 50% below cost!

In the next 9 months cash flow will be very weak, trying to pay off highly leveraged, overpriced assets. The solution is, unequivocally, the problem.

BTC In Focus

We can fairly speculate that on top of the fear and hysteria that pushed markets in February and March that Bitcoin was liquidated as part of the wider de-leveraging event.

In any case, we haven’t seen this type of monthly move very often.

The chart below shows several times since 2017 that the market has had similar down months. We see 3 types of negative down months. The first is the blow-off from the market making a huge move.

The second is market bulls giving up and it pivoting to a bear market, and the third is the final collapse where the whole market turns bearish, triggering the start of the bullish market.

ETH in Focus

ETH had a terrific run this quarter, likely due to staking and the promise of the launch of its 2.0 protocol later this upcoming quarter. We think that it has great promise as a strong performer when the markets stabilise.

Gold v Silver

The Gold and Silver spread has blown way out of proportion this quarter with silver suffering a 37% drop high to low.

For those who are not aware – the gold to silver ratio is a historic comparison used as far back as Roman times (at 12:1) to determine the value of money (currency).

The ratio had been highly important to the fortunes of Spain with their South American Gold, China with its Silver demand and Britain over the years.

This continued throughout the first and second millennium up until a 15:1 ratio in the United States.

This month peaked at what is the highest level in history.

This dislocation of historical relationships can only be indicative of one of two things. It is either that Gold and Silver do not, and will never matter again as a source of monetary value, or that we have just witnessed one of the most important historical events in the history of trade, business and finance.

It is an incredible event to coincide

with the failure of monetarist economics under US Fed Governors Greenspan, Bernanke, Yellen and Powell. These economics experiments were allowed by the post Bretton-Woods fiat currency system.

Gold and the Dollar

The US Dollar Index

squeezed hard this month as financial institutions scrambled for US Dollars to comply with new liquidity requirements after major de-leveraging and a major re-appreciation of risk.

The squeeze pushed the index near recent highs. Included in the second chart is a comparison of the dollar index during the GFC.

The dollar index is an interesting study next to gold, which if considered an alternative or competitive form of monetary value to the US Dollar can also be seen to have performed well recently.

Having said that it has gone sideways the last 3 months and in fact looks weak today.

Of note is that the charts are inclusive of Bitcoins timeline.

S & P 500

Whether it was because the market is in a bubble, the effects of High Frequency Trading, the failure of the volatility fading trade, that the entire market was long at the high, that we were in a superbubble or any or all of the above, this month saw the fastest decline in S&P500 history this month.

Market participants always extrapolate out to view the future and attempt to squeeze it into the present and this time it was biblical.

This time at 10%

At 20%

At 30%

Followed by the fastest correction in history.

Could there be a 20%, 30%, 40%, (50%?) chart available in the next month, given the nuclear response of governments globally?

What a time to be alive!

But the devil is in the detail and the detail here is that the Russell 2000 has acted as a leading indicator and is perhaps demonstrating the capacity of markets to take a leg lower.

Finally, it’s the end of the month and the quarter

We expect some moves in the end of quarter that could impact things given the adjustments made in month and quarter end.

Many funds will be looking to lock in profit, lock in losses and start their new month with a fresh slate.

This should provide more opportunity for short-term traders, who will be having a great time in this market as large funds move large amounts of capital in and out of liquid markets in attempts to stay ahead of the curve that can only be ham-fisted at this point in time.

Thomas Kuhn, CFA for Mine Digital

(Originally Published here)