(David Kotok is chairman and chief investment officer for Sarasota, Florida-based Cumberland Advisors. This is republished with permission.)
We have previously commented on the developing bitcoin/crypto phenomenon. And our clients know that we are not investing in crypto today, but are watching this carefully.
Our clients also know we have a position in a gold-miner ETF. Our email from clients, media, and readers has the bitcoin versus gold argument and the evolution of crypto at the top of the topic list. There is a lot of buzz.
Behind The Buzz
The buzz is not surprising when a new financial element appears whose price fluctuations can be $1,000 in a week. Interest in bitcoin and crypto in general is expanding at an exponential rate, and the range of opinions for crypto can fill a chasm.
At one extreme is the "tulip mania" assessment of crypto. We discussed it last month. See: http://www.cumber.com/tulip-fever/. On the other extreme are forecasts that crypto will replace gold as a reserve and that the ultimate bitcoin token price level may reach $50,000.
We are highly skeptical but realize that our skepticism may be a product of age and experience. Maybe we are guilty of a Luddite mentality.
We are also watching the development of the gold-backed-crypto alternative. We think that is a significant direction that blockchain transactions will take. We wrote about that recently. See http://www.cumber.com/bitcoin-gold-money/.
A perceptive reader asked about the relationship between President Trump's activities and the gold price. This question was posed in the context of the developing global crypto/gold nexus that we are seeing with the introduction of the Sharia-approved, gold-backed cryptocurrency. The reader struck a chord.
So, we set about examining the relationship of presidential approval ratings and the gold price. There is no history regarding a correlation between presidential approval ratings and the cryptocurrencies, since the only data points are very recent and were mostly established in the Trump administration era, which is only one year old.
There is no way to know if the rise in crypto attention originates in a worldwide reaction to the dwindling approval of Donald Trump as a world leader. We can debate this question as a political matter from all points of view, but we cannot find any historical evidence on which to base a solid conclusion. Crypto is just too new.
We can find some solid evidence when we examine the gold price.
Some Gold History
Readers are reminded that gold was priced at $20 an ounce a century ago. The "double eagle" was the largest-denomination gold coin. In the Depression era, the U.S. government altered that price and restricted the ability of our citizens to own gold. See https://en.wikipedia.org/wiki/Executive_Order_6102.
Under the Bretton Woods fixed-currency regime, established in 1944, the United States, under President Franklin Delano Roosevelt, agreed to a fixed exchange rate of $35 per ounce of gold, and we settled international transactions with intergovernmental gold exchanges at that price.
This agreement defined the operational structure until 1971, when President Richard Nixon closed the "gold window" and reneged on the previous U.S. pledge. The U.S. raised the official price to $42, but that meant nothing, as transactions ceased. See https://en.wikipedia.org/wiki/Nixon_shock.