As Bitcoin makes newer and newer highs, it finally broke above $18,000 today and is a whisker within reach of its old peak of $20,000 back in 2017. At the time after falling down to sub $5000, it was labelled as doom and gloom. After two and half years, it has defied gravity and recaptured its upside momentum. We all know the demand vs. supply argument especially the halving that takes place every four years, diminishing the supply of Bitcoin more and more. Despite this, the demand side was the one that was never understood properly. Nor is it today to an extent as it is debated and dismissed by a whole generation of legendary traders who think it's another hoax, a tool for the Millennials to gamble on the future. So, what changed?
Globally, central banks' balance sheets have reached $86 trillion, and counting. The world is awash with debt and central banks have no other choice but to print more. This was the nemesis that started the cycle back in 2008 when $120 billion was enough to cure the system. Now, even $4 trillion is not enough to boost sufficient growth. New money is being printed to pay off old debts, not leading to new productive growth. Central banks will never allow the great reset, let everything fall so the system can find an equilibrium. Instead they let it get bigger and bigger, as they fear depression for decades if the system collapses. Covid accelerated everything as governments had no choice but to use their old monetary policy tools. Now as the pandemic is going through second and possibly third waves, there is more work to be done. The ECB is a classic example of this madness, as even after a decade of balance sheet expansion, they failed to generate sufficient growth. Today they are embarking on yet more QE and buying assets to try yet again. At least we saw periods of growth in U.S. as they increased their balance sheets.
What all this means is that the only way central banks know how to pay off this debt is to deflate it away. That is the path they are going on. Fiat currency debasement. And that is where Bitcoin comes in. A move towards digital currency, the new world order. Even central banks are teeing up to move towards a central bank digital currency to retain control and ward off the systemic collapse of the financial system. More importantly it will allow them to individually add money to people's accounts digitally -- helicopter money and bypass the need for a government guarantee. A better way to think about it is the digitalized version of Gold and Silver.
During times of inflation, and it is a matter of when not if, physical Commodities like Gold and Silver benefit immensely. If Gold goes up by 10%, Silver can go up 5x that, and Bitcoin 10x that. It is all the same trade, just different ways of representing the same view, albeit with much more risk. With all Commodities, it boils down to demand vs. supply, and inventory balance. Bitcoin is only getting scarcer in supply at a time when demand is rising. The same can be said for Gold and Silver, even though Gold has ample supply and not in shortfall.
As real yields stay low as they have been and the Dollar even lower, why should Gold and Silver be trending sideways for the past few months? The market is obsessed with sector rotation post the wonderfully received vaccine news, i.e., selling out of winners and buying back the shorts that it is forgetting to focus on the secular theme. These charts are flat lining and slowly forming a bullish pattern trend. They are only held down by this sector rotation, but have stayed flat to small down despite this selling.
A fiscal bill may be delayed till January, but the Fed has said it would do what it takes to fill in when needed. That can only mean one thing, more QE, which ultimately leads to higher Precious Metal prices. Gold and Silver may be boring compared to Bitcoin, but could it be that the forgotten (boring) ones could be the next ones to break higher?
