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Daily Intelligence Briefing

Wednesday, December 2, 2020

Identifying Change-Driven Investment Themes – Five sections, explained here.

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Bitcoin Breakout Overshadows Gold as Institutions Buy in Big on Crypto

Summary: Gold suffered a rough month in November, while Bitcoin soared toward new highs. This decoupling undermined the improving correlation between the two assets – each benefitting from the weakening US Dollar. Bitcoin has been buoyed by groundbreaking headlines on the institutional side, while gold funds have begun suffering some major outflows. Some have even speculated money is flowing out of gold and right into BTC, perhaps lending credence to the crypto’s “digital gold” nickname.

Related ETFs: Grayscale Bitcoin Trust (GBTC), SPDR Gold Shares (GLD), VanEck Vectors Gold Miners ETF (GDX)

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Dollar Weakness Could Stem BTC-Gold Decoupling

As stocks bounced higher in November, Bitcoin (BTC) and Gold begun to decouple. That was a departure from the overall trend of gold becoming more correlated with BTC over the last decade. 

Last month, AMBCrypto wrote that, at the end of Bitcoin’s 1st halving in 2012, it was 2% and around 11% during the end of 2nd halving in 2016. 
After the 3rd cycle in 2020, the BTC-Gold correlation had jumped to 43%.

The price of BTC in dollar terms crossed $19,000 for the first time since 2017 last week while the gold languished. Despite the down month, gold came into December with a bang, bouncing off close to a five-month low on Tuesday, to log the sharpest one-day gain in more than three weeks. The yellow metal closed more than 2% higher, rising back above the $1800 level.

BTC has often been hailed as “digital gold” by its growing pool of adherents, but we’ve yet to see that assessment substantiated by empirical performance data.

What we do know for sure is that both Bitcoin and Gold are valuable as hedges against inflation and have certainly responded positively to huge monetary stimulus measures that continue to weaken the Dollar. The USD Index (DXY) is down more than -10% since mid-March and headed back toward a multi-year low yesterday on news of 
a bipartisan-backed COVID relief package in the US Senate worth $908 billion.

MRP has 
repeatedly highlighted the rapidly rising sea of cash sloshing around in the economy right now. Since the end of February, the M1 supply of money, which includes physical currency, demand deposits, travelers’ checks, other checkable deposits, and negotiable order of withdrawal (NOW) accounts, has increased by $1.8 trillion, or about 45%. This rapid debasement of the currency is expected to continue through at least the rest of the year with the Fed currently purchasing $80 billion worth of US Treasuries per month.

the Fed has indicated interest rates are likely to remain close to zero until 2023 and, with more fiscal and monetary stimulus measures undoubtedly on the way to combat the economic effects of COVID-19, investors can expect more inflation to depress US real rates (short-term interest rates – inflation).

The most obvious determinant of where the money goes is short-term interest rates and their differences from other currency regimes. Other things equal, it makes more sense to keep cash in a currency that has a higher rate of interest. Still, there is another key consideration: inflation-adjusted or “real rates”. However enticing a short-term yield may be, it doesn’t buy much if the purchasing power of the currency diminishes by more than the interest earned; or it can buy even more if purchasing power improves.

With US real rates now stuck in negative territory for the foreseeable future, it’s not surprising that gold and BTC are each becoming more preferable to the Greenback.

For those investors who still question whether inflation will actually pick up in the next few years, Charlie Morris, chief investment officer at ByteTree Asset Management, told Kitco that they just have to take a look at other commodities. Copper prices are currently trading at an eight-year high, and oil prices are starting to creep higher. Oil prices are benefiting from ongoing news of potential vaccines for the COVID-19 as investors start to price a faster-than-expected recovery in the global economy.


Institutional Attitude Adjustment Boosts Bitcoin

Explaining the decoupling of BTC-gold may be as simple as looking at who is making the big headlines at the institutional level.

In November, the Grayscale Bitcoin Trust (GBTC), an ETF tracking the price of BTC/USD and mitigating the risk of owning BTC outright,
 recorded all-time high net inflows while the CME Bitcoin futures market saw its open interest climb near $1 billion. As we noted last month, GBTC has been registering consecutive quarters of outperformance. Per JPMorgan, the “ascend of Grayscale Bitcoin Trust suggests that Bitcoin demand is not only driven by the younger cohorts of retail investors, i.e., millennials, but also institutional investors such as family offices and asset managers.” The investment bank also found that 93 tons of precious metals have been dumped by bullion-backed funds, worth some $5 billion, since November 6.

According to Bullion Vault, Hedge funds and other speculators in Comex gold futures and options 
cut their bullish bets on the yellow metal by 7.9% and grew their bearish bets as a group by 9.2% in the 5 trading sessions ending last Tuesday say figures compiled by US regulator the CFTC. That pulled the net speculative position of Managed Money traders in gold derivatives down by 14.5% from a week earlier, the sharpest weekly retreat since mid-September, to the smallest since May 2019.

During this same period, Guggenheim Partners disclosed in a regulatory filing that its Macro

Opportunities Fund held the right to invest up to 10% of its net asset value in Grayscale Bitcoin Trust. A position of that size would be worth roughly $530 million, according to Business Insider.

Additionally, Rick Rieder, CIO of BlackRock, 
told CNBC that Bitcoin and cryptocurrencies are here to stay, largely due to the enhanced functionality. “Do I think [BTC] is a durable mechanism that will take the place of gold to a large extent… yeah I do, because it is so much more functional than passing a bar of gold around.” Larry Fink, the head of the firm, followed up Rieder’s optimism this week, noting that cryptocurrencies have the possibility of evolving into a “global market”.

BlackRock, the world’s largest asset manager with $7.4 trillion in AUM, is already exposed to BTC via MicroStrategy –  in which it has a 15.24% stake. With major crypto exchange Coinbase as its custodian, 
MicroStrategy invested $425 million into Bitcoin this past September.

CoinTelegraph writes that, in a Fidelity survey of almost 800 institutional investors, 36% owned crypto assets. It also projected that 90% of institutional holders of crypto assets expect to invest even more in Bitcoin this coming year.

Obviously, at this point, the amount of money in Bitcoin is nowhere near the size of the global gold market. But even a Bitcoin’s market capitalization is currently only 3.1% the size of gold, according to James Butterfill, investment strategist at CoinShares, which sells investments in digital currencies. 
If that increased to 5%, it would imply a price of $31,300 compared to around $18,700 currently, he estimated.

At this point, MRP does not believe Gold an BTC are competitors. Rather, Bitcoin’s recent outperformance, relative to the yellow metal, is more likely related to the fact that BTC has been making nonstop news over the last month or so, stoking a strong momentum trade. Over the long-term, we expect the BTC-gold correlation to recover and for both of them benefit from ongoing fiscal and monetary stimulus efforts’ debasement of the Dollar.


Additionally, MRP believes silver may be a stronger candidate than gold, when it comes to precious metals through the end of the year and into 2021. Due to the ongoing economic recovery, which boosts industrial demand for silver, we believe the metal is well positioned to outperform gold. MRP added LONG Silver and Silver Miners to our list of themes on July 22, 2019. Since then, the iShares Silver Trust (SLV) and Global X Silver Miners ETF (SIL) have returned 45% each, outperforming gold, gold miners, and the S&P 500 over the same period.


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