Bitcoin, Gold, Oil, USD, Inflation Expection, and Price

Recent news on the price of oil shows a dramatic decline that seems to be lock in step with the decline of the Russian Ruble/economy. Nick Szabo has extensively outlined a detailed argument that such a decline of the price of oil in relation to our global bedrock currency (USD in today’s era) suggests a decrease in inflation expectations of that bedrock currency:

 Such price movement is strong evidence for the movement being primarily a phenomenon of changing money supply or demand rather than of changing supply or demand for particular commodities

This realization is often missed because of a seemingly simple oversight:

Those supply/demand curves in the first chapter of your Econ 101 textbook assumed that goods are sold for some  fix standard of value, a currency. But under floating currencies, which the world has had since the U.S. went off gold in 1970, there is no fixed standard of value.

In fact such a change would be expected to be fairly “instant” and observable:

The problem the Federal Reserve faces is that with modern digital markets any inflationary behavior on its part is reflected in oil prices as soon as any big money learns about said behavior, and is thus usually reflected at the retail gas pump within a week

Another significant observation is that, when observed from the context of floating currencies, gold and oil generally tend to move tandem:

Indeed the commodities with the most liquid markets and inelastic supply, such as oil and gold, tend to move in lock-step with each other.

Another way of putting this is that, when currencies become unreliable as a store of value, commodities take on part of that monetary role. Both oil and gold increase in value by performing this monetary function better than the currency against which they are being traded

Assuming such an observation is true, we might might then test such a theory by observing the recent prices of Gold vs Oil to see if in fact they are moving together, failing (as oil is), in relation to the USD.

gold oil usd

We can see somewhere around October (2014) a massive shift in the economic climate.  Its true oil is failing against the USD but if recent decreases in inflation expectations are the cause (perhaps the FED decided arbitrarily printing money isn’t fun anymore), then why don’t we see a similar decrease reflected in the price of gold? Is Szabo mistaken?  The author suggests we should assume he is not.

Then what might explain such a phenomenon?

Assuming for a moment Szabo’s explanations of “price” are in fact correct we might then think about those peoples previously invested in recently sinking oil and the Ruble.  Where might the savvy investors and the mass markets that follow move to?  Bitcoin is seemingly the obvious answer since it is the currency with the most stable printing supply, but alas this doesn’t seem to be the case either in fact bitcoin’s price has been on a steady decline for the past year:

bitcoin price

The fact that such investors leaving the Ruble and oil are not flocking to bitcoin is not likely to come as a shock to almost anybody.  Simply put the mental transaction/entry barrier is just too high, and this is compounded no doubt with a falling (albeit somewhat stabilizing) price.

The obvious answer then is that such investors’ equity left Russia and the oil sector for either the USD and Gold or possibly both.  This might explain the recent run and strength in the USD in the midst of a comeback from what the population of the world has come to learn as the most paper and fraudulent banking system in the history of man. Can the USD really be strong in the light of their economic strategy of spending trillions of dollars on destabilizing foreign economies just to hold their position as the world’s bedrock currency? Even without bitcoin it seems pretty clear that such an outlook cannot be one of stability.  With bitcoin, one simply has to ask which investment seems more sound-one built on market price or the other (USD) built on self sustaining itself.

If we take the assumption that gold should at least somewhat be moving in tandem with oil, then we should tend to think that investors recently have moved from oil into gold somewhat and perhaps some gold bugs have offset such a change by moving from gold into some “other” prospect.

So why the decline in the price of bitcoin, when seemingly its purpose is to bring such a universal stability to our global economy?

Well if we take Szabo’s word (which the author does), and if we don’t in fact believe the price of the USD reflects its’ stability and worth, we have in fact spelled out a story.  The US is reveling now in its price and the markets belief that the US economy is strong and growing (contrary to common intuition), and is happy to go along with the story that US sanctions are helping keep the bad guy Russia in check because of recent actions in relation to the Ukraine situation.

But in reality, bitcoin has entered our civilization and the drop in oil price is an immediate ramification since our future (asymptotic) expectation of inflation is zero.  We do not expect governments to arbitrarily print money in the future, and so comes the asymptotic decline in holding BOTH oil and gold as a hedge vs falling and floating currency systems. One doesn’t have to look far to think about the types of entities that have an interest in a strong dollar and or gold price vs bitcoin. What is likely then is these entities have been doing there best (and spending resources) to do anything they can to keep the price of bitcoin down (google US government seizures of bitcoin)..

This means something that should be quite interesting to anyone reading this.  The shift from oil to gold and the USD has created and sustained the next bubble to pop.  Such a bubble might be prolonged with certain measures such as reigning in the monetary supply, however how much money can a government take off the currency market before the corresponding financial system shows clear signs of implosion?  Can the US government just let such a price slide? The US and any countries leaning on the USD as a bedrock might in the near future find itself in an interesting situation:

If foreign governments thought the Federal Reserve was going to hyperinflate, that would probably cause them to dump the Treasuries in a kind of self-fulfilling prophecy. It would be a run on the federal government itself, the biggest run on a bank the world has ever seen. This is not a probable risk, but it has now become a quite significant risk.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s