What Yellen’s Speech Means For Gold And Bitcoin

Submitted by Michael Mansour, Senior Commodities and Cryptocurrency Research Analyst at DigitalTangible a secure platform to purchase gold and digitize assets on for trading.

Ms. Yellen clarified the Federal Reserve’s most recent FOMC meeting minutes, as it did not divulge into the finer details underlying their decisions to keep their policy rate at 0-0.25%.  They are maintaining accommodative monetary policy because the labor conditions are so nuanced, they cannot use the simpleunemployment figure and inflation itself as the deciding point to raise the fed funds rate.

While a full fledged discussion of her take on labor conditions would be too onerous for this context- I will summarize.  One of the primary issues is the labor force participation rate: its dynamics have changed since the great recession of 2008, such that more people are removing themselves from the available labor pool for a variety of reasons.  Some are taking disabilities, others are going back to school (become more competitive to get a job), and many are retiring early(if you can’t get a job now, why not just start living off of government payments and your 401K); much of this is caused by the prevailing conditions following the recession,and will likely abate once the economy turns around substantially.

Another major issue lies in what we consider ‘employed’: after 2008, we have been continuing to count people who work part-time jobs, but who are really seeking full-time employment, as employed.  In reality, someone working only a part-time job, or two of them, is not in the same boat as a person will a full-time job for reasons like reliable hours, job security, and benefits.  When you have a disproportionate amount of people in the former condition, making judgments about the economy can be spurious at best.

Changing the current course of action is being left to a ‘whenever the economy is ready’ kind of attitude.  What this means is that they are waiting until conditions have met maximum employment and target inflation (2%), while attending to the underlying nuances discussed above .  They don’t know how long this will take and will continue accommodative monetary policy until they deem conditions suitable for gradual tightening.   This really does not give investors clarity on which to plan investing, but regardless, fine tuning the economy does rely on a plethora of signals. We hope this stance does not affect the central bank’s credibility, and thus its effectiveness with announcements.  Read the transcript here.

Gold

I’ve put together a small reading list on some topics to get you ready for the week.   Gold had a constant downward trend this week, starting off at $1305/oz and dropping to $1275/oz, a  $30/2% loss.  This is much less than what bitcoin had seen though.  It is possible that gold was reacting to FOMC minutes announcements, even though they really did not differ much from the previous week’s minutes.

There were also no new geopolitical risks that sent investors reeling into gold as a safe haven.  Could this mark the beginning of the decline of gold from prior highs?   I don’t think the decline will start with force, given Janet’s comments this past Friday.  The Fed is planning to maintain its schedule until better conditions prevail-this is fairly unpredictable given so many exogenous factors that could throw the recovery off, like further economic losses in Europe or China. However, once this begins, we might expect to see capital flow to where higher returns can be made.  Given a pent-up demand for higher returns-hopefully it will not create an asset bubble.

Bitcoin

Saturday trading began at $493/BTC and is at $496/BTC at the time of this writing on Saturday, August 23.  Interweek trading, however, is not represented well in this static view, as there was a flash crash and some serious pump and dump activity going on that depressed the price to as low $448/BTC and to as high as $530/BTC, a 15% spread.  With all the commotion that ensued, patient investors really did not lose out on their holdings as easily spooked beginners did.   In the short run, bitcoin will not be affected by the Fed’s current path.  However, this will change once rates go uphill: bitcoin, by nature, is a store of value that only offers some gains through very active trading.  Classically, money will flow away from these towards higher-yielding investment vehicles when the opportunity arises. Unlike gold, we have not seen a ‘fear factor’ dynamic in bitcoin, which means that its downward projection, once started, should be more steady in theory.

Bitcoin Reading

Bitcoin is not easy to understand, but http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2438299 author writes extensively and makes sense of how mining fits into the system.

Bitcoin adoption effect its price: As we see more merchants accept bitcoin payments, there will be increased sell pressure because they immediately liquidate their cryptocurrecy for fiat.  Track bitcoin adoption rate with data on the http://www.bitcoinpulse.com/ dashboard so you can make smart trading decisions.

Want to know if bitcoin is legal in a country you’re traveling to? Examinehttp://en.wikipedia.org/wiki/Legality_of_Bitcoin_by_country.  If you live in one of these countries where it is hard to buy bitcoins, consider buying it with gold vaulted in another country.

Taking blockchain technology to the next level by using it as a notary for, as an example, security video footage that includes signatures to ascertain the footage has not been altered. https://github.com/NotaryChains/NotaryChainDocs

Gold Reading

Jay Taylor provides some current real-world examples as to why trying to artificially alter the state of something (energy prices or financial health of firms) inevitably breaks down, causing painful effects for everyone.  He applies this logic to how gold is manipulated, and some signs as to when the end of gold manipulation will be near. Read his article.

 

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