Posted in: Archive
Published:
October 30, 2014 1:32 PM UTC

Bitcoin Price Correlation With Gold Post-QE

Yesterday, following the eagerly anticipated Fed Policy Statement in which it acknowledged the termination of Quantitative easing (QE), the Bitcoin price took a downward path along with Gold. We consider the outlook for the global economy in the weeks ahead as well as the implications…

Yesterday, following the eagerly anticipated Fed Policy Statement in which it acknowledged the termination of Quantitative easing (QE), the Bitcoin price took a downward path along with Gold. We consider the outlook for the global economy in the weeks ahead as well as the implications for the Bitcoin price.

Start of the Post-Fed QE Era
Global Economy
Bitcoin Price Correlation with Gold
Summary
Comments

Start of the Post-Fed QE Era

The Fed being the world’s most powerful central bank – a veritable “center” of all central banks – their decisions and policy lead cascades to all other economies across the globe.

The immediate effect of yesterday’s announcement of the termination of quantitative easing (QE) is that the US equities and bond markets will begin a necessary decline. The inevitability of this outcome is guaranteed by the stated aim of the Fed to spend the money it prints ($85 billion a month at the peak of QE) on two distinct targets: US Treasury bonds and equities (stocks), via agreements with banks to prefer loans destined for equity and mutual fund investment.

Another effect of stopping QE (liberal dollar printing) is that now the Dollar will reflate as can be witnessed across forex charts today. Consider that the Fed does not want a strong Dollar precisely because it will undermine their efforts at increasing the rate of US inflation. So, although the Fed has pledged to increase interest rates, they’re caught in a trap: as soon as they start increasing rates, the Dollar will immediately strengthen as investors move their wealth into USD – perceived as strong and yielding higher interest than other currencies in country economies with lower interest rates.

The core problem is that the Fed applied QE, combined with near-zero interest rates, in an effort to artificially kickstart a new Keynesian business cycle. However, the behemoth QE experiment failed miserably. Had it succeeded, we’d see:

  • increasing employment in the US,
  • rising inflation,
  • greater productivity,
  • greater manufacturing output and
  • increases in quarterly GDP.

Yet, all of these measures are declining instead of increasing. So, a cursory tally of this spectacular central bank foible shows the following results:

  1. massive debt ($1.66 trillion over five years of QE),
  2. a weakened US Dollar,
  3. household saving was made impossible (by imposing a blanket near-zero percent interest),
  4. burdening of future generations of taxpayers (who must pay off the debt)
  5. stifled consumer spending power (as a result of the weakened US Dollar)
  6. damaged retail sector (as a result of low consumption in point 5 above – low spending power and no savings, right?)
  7. equities and bond market bubbles which threaten collapse in the absence of QE-smack.

Most central banks hold USD and US Treasury bonds as foreign reserves and securities. A strengthening Dollar is to their benefit, but a weakening bond market is not, so they will seek to sell those bonds and thereby contribute to a vulnerable bond market on the edge of a confidence cliff. This is neither arcane knowledge nor is it an extrapolation of how the bond market operates. Historic economic patterns and trade-winds as well as reliable market ebb-and-flow is gone. The outcome is one that is well-understood by the Fed and, therefore, a willing risk (or sacrifice) they engaged at the behest of the wealthiest 10%.

Here is a chart showing the percentage of US income that falls to the wealthiest 10% of citizens in various countries since WW2. The US is graphed in maroon.

The outlook is bad for ordinary working people in the US and the global economy in general. On the “positive” side, wealthy people in the US are even more wealthy after the conclusion of the QE program!

From the Economist:

…the top 10% of households own about 91.4% of outstanding stocks and mutual funds, up from 84.5% in 2001. The richest 1% own almost half of all stock and mutual funds. No surprise then that the recent jump in consumer sentiment recorded by the University of Michigan was led by the better-off; upper income households (the top third) had a 15 point increase in sentiment, the bottom two-thirds rose just five points. No surprise, either, that since the start of the crisis, inequality (as measured by the Gini coefficient) has risen, not fallen.

Given that this wealth effect is obvious and well understood by the Fed, we can call out a hypocrite when they reveal themselves:

From the Wall Street Journal:

The extent and continuing increase in inequality in the United States greatly concern me.
– Janet Yellen, Chairperson of the Federal Reserve

As the house of cards that the Fed built on a sandy patch (in the rising tide) slowly folds in on itself, Bitcoin can be expected to become the receptacle of much of the money fleeing equities and mutual funds and seeking out high-yielding risky investment vehicles. The regulation sought by so many institutional players has prepared the ground for what could be the greatest Bitcoin rally to date. However, the caveat is that the cryptocurrency risks becoming a prostitute to Wall Street, like so many derivatives (including paper Gold) before it. Bitcoin the commodity and Bitcoin the Blockchain have very different functions and let’s hope that the drive toward pervasive adoption and regulation does not weaken Bitcoin’s far greater political utility.

Also read: Bitcoin Price and QE Closure
Also read: IMF Urges Banks to Manage “Perception”

What do readers think? Please comment below.

Global Economy

S&P500 vs Gold vs Bitcoin

S&P500 (black), Gold (purple) and Bitcoin (Yellow).

US Dollar

The US Dollar is rallying across the board. Here is a chart showing the market’s reaction to the Fed Statement as expressed in the Dollar/Yen (USDJPY) forex pair.

USDJPY 15-minute Chart

Selected Economic Data

  • US Unemployment Claims
    • expected: 283K (previous: 284K)
    • actual: 287K
  • US Advance GDP Price Index q/q
    • expected: 2.0% (previous: 2.1%)
    • actual: 1.3%

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Bitcoin Price Correlation With Gold

Time of analysis: 06h00 UTC

Asian Session

The Bitcoin price is skirting just above $330.

The following Bitstamp chart has additional overlays of BTC-China (yellow) and Gold (purple). Note the positive correlation between the Gold and Bitcoin price charts.

Bitstamp Hourly Chart

Summary

Targets for reversal remain $330 and $290.

Dropping below the 5 Oct low of $275 opens up $259 and $205.

See yesterday’s analysis summary for trading strategies pertaining to the reversal targets mentioned above.

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The Bitcoin price chart and trade metrics are available.

Readers can follow Bitcoin price analysis updates each weekday on CCN. In-depth analysis articles are published every Sunday.

Disclaimer

The writer is fully invested in Bitcoin via BTC-e and Bitfinex. Trade and Investment is risky but not as risky as some other things out there. Take care only to take action in the market when you are 100% sure of the outcome. CCN accepts no liability whatsoever for losses incurred as a result of anything written in this Bitcoin price analysis report.

Bitcoin price charts from TradingView.
Income Distribution chart from https://topincomes.parisschoolofeconomics.eu
Images from Shutterstock.

Last modified: February 13, 2020 5:41 PM UTC

Venzen Khaosan @venzen

Market analyst and Open source developer with a keen interest in blockchain technology, consensus mechanisms and the decentralizing effect. He has found a solution to the PKI mechanism. Email me to discuss.

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