Crypto Crashes as Gold Gains

Crypto Crashes as Gold Gains

Friday, 21 May 2021

Crypto Crashes as Gold Gains

An eventful week in markets this week as the crypto market entered free fall, with precious metals continuing to trend higher. Spot gold in USD broke out above the recent downtrend line from August, but we would be surprised if it comes back to test that level again soon. With precious metals being late to the inflation party we expect prices to be supported by the recent trend lower in ‘real yields’ in the US.  

We warned over the past few updates about the high probability of a major correction in bitcoin, and indeed we saw it take place this week in a rush for the exit. In todays update we will cover why the move was predictable and what you can look for in the near term.

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First to metals, and the breakout above $1,850 USD is yet another positive development for gold from a technical perspective, as we have managed to clear the downtrend line from August 2020. In the very short-term a move back to test that level of around $1,850 would not come as a surprise and gold will have some profit-taking risk after such a move from the recent $1,700 lows. Silver had a good week this week rising 3%, with the gold:silver ratio remaining relatively flat at 64:1. On a very long-term gold:silver ratio chart below we still expect this trend of silver outperformance to continue with a target for the ratio to retreat below 50:1. Physical silver investors in the US and elsewhere continue to put pressure on refineries and mints and US wholesale premiums remain very elevated, indicating robust physical demand is continuing.

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The flash crash in Bitcoin to USD $30,000 this week should not have come as a surprise, as the price action in the lead up to the sell-off was signalling major warning signs of a top forming. For an asset class that cannot be valued by traditional methods, cryptocurrency performance in the near-term is largely dictated by psychology, and hence the participants and traders place much more importance on charts and technical analysis than other asset classes. This can lead to some predictable moves like the one we saw play out this week.

Bitcoin

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As noted in our update on the 23rd of April it was becoming quite evident that BTC was losing momentum with each new break higher into new all-time-highs. Each new rally was met with less and less enthusiasm and more sellers eager to take profit. If you are trading or investing in this space you need to be aware that 90% or more of the participants are looking to cash out at the top. The majority are also watching charts as their primary indicator for making decisions to buy or sell, so as soon as the price action looks like a top has formed, you get a rush for the exits, which triggers panic selling and stop-losses being hit. Our regular readers have had multiple warnings over the past few weeks of the high probability of a major correction.

From our 23rd of April Update

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The size of the rallies getting smaller and smaller after each new all-time high is not something you want to see from an asset class that depends entirely on momentum trading. Now that a lot of crypto currencies have seen large pullbacks, the mentality can easily change from greed to panic, and the race to cash out for fiat looks like it is starting yet again. The trouble with holding any asset that has an exponential rise in a short space of time, is that there is significant risk of profit taking after such an event. It may be too soon to call, but I would comfortably say that this latest bubble in crypto is no smarter than the last, and from this point to the end of 2021 you are more likely to lose money than make it in the crypto space”

Ethereum this Week

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Looking forward, after a quick 50% correction in Bitcoin we will no doubt have bargain hunters entering new longs, so we could see the price do anything in the short-term, which could include a bounce to trap new bulls in at $50k. Given the clarity that $65k was indeed the top of this latest cycle in Bitcoin, it would be safe to assume a bear market from here draws out over the medium to long-term, similar to what we saw after the 2018 top. Anyone out there claiming bitcoin to be a hedge against inflation needs a reality check, as we have seen the largest year on year rise in the US CPI print in 10 years, with bitcoin crashing 50% about a week later. The crypto market does not care about inflation numbers, nor what real-yields are sitting at, but the gold and silver market certainly does.

 

Until next week,

John Feeney

Guardian Gold Sydney

If you have any feedback or questions about this report, you can contact John Feeney direct at johnf@guardianvaults.com.au

Or on Twitter @JohnFeeney10

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