Gold and silver look top speculative asset choices as Bitcoin bites dust

Just over a year ago Bitcoin was hanging on to its status as the speculative star. Commentators like me who had doubted it in the summer of 2017 were proven wrong as the cryptocurrency trebled to top out at $20,000 in December 2017.

But last year this bubble burst. By the end of 2018, Bitcoin was trading below $3,000. More than 1,000 copycat cryptocurrencies joined the graveyard at www.deadcoins.com.

Bitcoin is a currency you cannot actually use to buy anything. Its unstable price means it is not a store of value either, although it takes vast amounts of electricity to power up the computers to mint it.

What this computer-code money did become was a speculative bubble, in the grand tradition of bubble assets. These arise at times of excess liquidity in markets and often have little tangible value.

One former Dubai journalist I know now sits on the island of Fiji in the Pacific Ocean counting the millions he made as an early Bitcoin miner. He also knew when to get out.

There are two major problems with speculations: picking the right one, and when to exit before the inevitable crash.

More solid speculations such as property or shares will fall as well as rise in value, but when it comes to something such as Bitcoin and the me-too cryptocurrencies, you have to wonder if you ever possessed a real asset in the first place.

If you erase your hard disk containing this computer code it simply vanishes, as happened to the unfortunate London IT worker James Howells, who threw away his laptop containing 7,500 Bitcoins worth $56 million in 2013. Even wallets held by third parties have been hacked. By contrast bank accounts are always backed up. Nobody lost a cent on 9/11.

Indeed, the idea of a currency without a central bank to operate it always scared me off. What, nobody to keep inflation under control? Who needed another currency anyway? What could it really add?

The truth is that once the great story behind a bubble asset has been rumbled, it is almost impossible to push its value back up again.

Of course, Bitcoin did have some other big price falls on its 10-year journey to $20,000.

But once you have a truly epic bust then convincing enough investors to reflate the price to that level again is not going to happen, or at least not for a long time.

Silver is a somewhat comparable speculative alternative to Bitcoin. It has been used as money since the dawn of civilisation, albeit as monetary metal not computer code.

In recent years silver has become more of a speculative asset than a currency, although it is vital for smartphones and other electronic products.

From 2000-11 the price of silver rocketed from $3 to $49 an ounce. That was its biggest bubble since the previous one in the ‘70s, which ended at $50 per ounce in 1980.

What other commodity is currently cheaper than it was in 1980? None.

Silver acts as a leveraged play on the gold price as the supply of silver is tighter than gold. So when the king of monetary metals rises in price the queen makes double that gain.

Therefore, if you think 2019 is going to be a great year for the gold price, you should do much better speculating in silver.

Gold bulls are back. There is a general consensus that this should be a good year for safe haven assets because the political and economic outlook is uncertain and financial markets became highly volatile in the fourth quarter of 2018.

Moreover, gold prices are still depressed from their $1,923 all-time high of 2011.

Suddenly talk has switched from Fed interest rate increases to whether they will be possible at all in 2019, or whether they could even come down.

Further falls in stock market prices culminating in a climatic sell-off – possibly this spring due to the Brexit and Chinese trade war – would be met by lower interest rates and the return of quantitative easing.

The last time this happened in 2009-11 gold prices more than doubled and silver shot from $8 to $49 per ounce.

Anybody with a speculator’s eye will have noticed that 600 per cent gain in a little over two years for silver. Could that be about to happen again?

Once the great story behind a bubble asset has been rumbled, it is almost impossible to push its value up again

Peter Cooper has been writing about finance in the Gulf for two decades