By Parke Shall
The time for gold and Bitcoin is right now, despite both of these “safe haven” assets already moving to recent highs over the last couple of weeks. We believe both assets will continue to move higher and that this is the time to have exposure to both of them.
The market experienced more jitters this week, just days after we wrote an article suggesting that it could be on a hairpin trigger to the downside. Volatility continued this week, first on a rumor that Gary Cohn was resigning. Even though this rumor was proven to be false, according to official statements released by the White House, the market was unable to bid back all of the ground it had lost when the rumor first hit. This inability to take back the ground it had lost after the rumor was proven to be false shows us that the market may have a little more of a bias to the downside at this point.
Also, on Friday, it was announced that Steve Bannon had either resigned from the White House or was fired by President Trump, depending on what news article you read. Regardless, this was seen as a positive for the market when the news was announced, but the market wound up giving back all of these gains as well late in the day on Friday.
Not only do we believe that this sequence of events shows that the market is cautious, but we also don’t believe that the volatility is over. The fact that the market has moved lower in situations where “bad” rumors were refuted or “good news” hit the tape may indicate that overall sentiment is changing from bullish to somewhat less bullish, or perhaps even neutral or bearish.
Just hours before the Cohn rumor made its way onto the wires, a strategist on CNBC had predicted that his resignation or removal could cost the market. The report stated,
The markets would crash if top White House economic adviser Gary Cohn resigns, Yale School of Management’s Jeffrey Sonnenfeld told CNBC on Thursday.
“I don’t want to be an alarmist, but there is a lot of faith that he is going to help carry through the tax reform that people are looking for,” Sonnenfeld said on “Squawk Box.”
“I think if he steps away, it would crash the markets,” he said.
The market seemed to agree with the way that it reacted to the rumor late last week. However it doesn’t appear as though the market is completely convinced that this isn’t a possibility based on its reaction to the official White House response. And we also don’t think assuming that any member of the Trump cabinet is locked into their jobs right now is a safe assumption. When we look back on the amount of individuals that have come and gone in just the first half year of this presidency, we don’t think it is ridiculous to assume that additional departures could happen, especially when articles like this one from Newsweek are being tossed around talking about how the Senate only needs six votes to impeach the president:
Following impeachment in the House, a trial takes place in the Senate. Conviction requires two-thirds of the Senate and by my count there are already twelve senators who have shown a willingness to take on the president when they believe he is in the wrong.
If you add that to the forty-eight Democrats in the Senate (who have shown no inclination to work with this President), Donald Trump could be six votes away from conviction in the Senate.
Regardless of whether not you would see this as a good or a bad thing, if it occurred, volatility would likely go through the roof. The markets like stability and predictability and throwing this type of wrench into the gears has not only already slowed down the bull market here of late, but also seems to be possibly shifting overall sentiment.
We have a long argued that we are on the back end of this bull market. Every time we bring up problems like student debt, subprime auto loans or consumer credit, the market somehow finds a way to grind higher. We think the geopolitical and domestic political situation has changed things in a profound way. We are not only dealing with uncertainty with our own administration; we also continue to deal with issues like North Korea and a newly revitalized potential trade war with China, as documented by USA Today on Friday:
China’s government on Thursday warned “there is no winner in a trade war” after an aide to President Donald Trump called in published comments for a tougher stance toward Beijing.
A foreign ministry spokeswoman, Hua Chunying, appealed for dialogue to preserve stable relations when asked about the comments by Trump’s chief strategist, Steve Bannon.
In comments to The American Prospect posted online, Bannon said the United States is in an “economic war” with China. He recommended pursuing a trade investigation of Beijing’s technology policies and anti-dumping action over Chinese exports of steel and aluminum.
We continue to believe that this new potential volatility profile for the markets means that investors should increase their exposure to asset classes that may be considered safe havens in the event of increased volatility. We are continuing to reduce our exposure to equities and bonds while at the same time increasing our exposure to emerging markets, international currencies, precious metals, and we even have a small allocation to Bitcoin.
We have been spot on with Bitcoin, calling it a buy the entire way up to where it stands now. We also have advocated for owning gold in many of our past articles, a position that has borne less fruit then Bitcoin, but which certainly has still panned out.
Our thinking on owning both Bitcoin and gold as safe havens is as follows. Gold is the traditional tangible safe haven. It is a physical asset that investors can own and actually hold on to in times of volatility and crisis. As the dollar’s purchasing power continues to weaken over the course of time, gold will continue to catch a bid over the course of the longer term. However, we believe gold may also find a bid on its own as volatility ramps up. We can easily see gold going to $2000 an ounce within the next couple of years especially if global uncertainty begins to creep higher. We already believe that it will catch a bid just due to the natural course of the economic cycle putting the United States back into recession eventually as well.
For Bitcoin, the reason to own it is similar to that for gold in the sense that there is only a limited supply and that it is a hedge globally against all currencies and the central banking system. While gold is somewhat of a pain to store and transact in person, Bitcoin fills in that gap, making peer to peer transactions that are decentralized extremely easy and available to its owners. However, in the event of any type of catastrophe where infrastructure is compromised, Bitcoin could then see itself become unavailable to its owners, as it requires access to the web to transact.
We think that the benefits and cons of both of these old-school and new-school hedges against the system make for a nice yin and yang combination and we would be inclined to own both gold, as an old-school hedge and Bitcoin as a new-school hedge heading into the future. We believe both will continue to appreciate meaningfully in price over the course of the longer term.