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Gold and Cryptocurrency Forming a New Relationship?

16 Jul
Will Bitcoin be backed by gold?

Gold and Cryptocurrency Forming a New Relationship?

Gold Market Discussion

A Cryptocurrency Backed By Gold? Sure Makes Sense, Doesn’t It?

cryptocurrency backed by gold

Cryptocurrencies like bitcoin have experienced massive rallies recently as a possible, alternative safe haven investment.  Are Gold and Cryptocurrency forming a New Relationship? Naturally, a cryptocurrency such as Bitcoin brings inherit fears of instability and raises questions from investors. This being mainly because the “currency” is backed by what? What if it is hacked? What if the “money” disappears like when Mt. Gox was hacked and essentially robbed in 2014? $460 million disappeared- and unlike a FDIC banking institution, Bitcoin investors- not the bank-  were the victim. As digital devices become more and more embedded into our minute-by-minute lives, digital currencies are the natural progression.

What would boost public opinion and trust? Gold. Physical gold. Just like the “good old days” when our nation’s dollar was also secured by the most recognizably traded asset in the world, a couple of cryptocurrency companies are now moving to back up their digital currency with physical gold. Makes sense, right? Well- as digital currencies evolve and become more and more embedded in our lives (the inevitable)- gold might just be the asset that supports the stability of it- just like the good old days. And yet- another reason that every investor needs a portion of it.

Approval of Gold in Major Islamic Institutions could be a Major Contributor to Gold Backed Cryptocurrencies

In December of last year, major Islamic finance institutions approved gold for investment purposes, which previously had been considered illegal under Shariah Law. A quarter of the world’s population is Muslim, so it stands to reason that this would boost global demand. Cryptocurrency trading is still high restrictive though under Islamic financial law. But now a company called OneGram has made it possible to comply cryptocurrency trading with Islamic finance by backing each virtual coin with a gram of gold. This will open new windows for trading both currencies in the Islamic finance sector, which is growing at the significant rate of nearly 20% a year.

What this means for investors: The appeal of cryptocurrency has similarities to that of gold. As a decentralized currency, it is not subject to government manipulation. Additionally, it is an anonymous way of paying for goods and services, making it more like cash than trackable digital credit and debit cards.

With this new market opening up in the Islamic financial world, gold demand could get a significant boost. Backing up cryptocurrency with gold also illustrates just how universally valued gold continues to be. Its value will almost certainly persist for a long time. In the end, gold is the true physical asset that the world recognizes. No matter what the form of currency may be- it sure is interesting how each one of them is ultimately thought that the most secure backing is gold. After all, it just makes sense.

Gold Rallies This Week on Fed Announcement and Weak Data

federal reserve banking noteLast week we called a new low for gold and recommended it as a buying opportunity. This week gold rallied, closing out the week up 1.5% at $1,230. Gold initially jumped in anticipation of Fed chair Janet Yellen’s hearing before a Senate banking committee. Disappointingly low June retail numbers and flat consumer inflation are worrying analysts about the merits of raising interest rates again soon. Gold had rallied when these numbers were initially released, and they have caused concern about the robustness of the economy to handle another interest rate hike.

What this means for investors: The fear over the next monetary policy steps has investors looking at safer, non-interest bearing assets like gold. The Fed has said it will raise rates at least once more this year as well as unwinding its $4.5 trillion balance sheet, which could tighten economic conditions. Additionally, the dollar index was down this week as gold rallied. Gold and silver demand will continue to go up as uncertainty is stoked by the Fed, and with it investors will see prices go up. Silver was up as well on the Fed’s doveish-ness and wavering.

Some Analysts See Frothy Markets and Recession Fears

Peter Boockvar
Peter Boockvar on CNBC

In increasing numbers, analysts are seeing danger ahead for the stock markets. Peter Boockvar warned, following the Janet Yellen hearing. He warned that tightening cycles generally lead to recession, and does not see any reason why this should be different. In his assessment, just because the Fed warned of what they were going to do (reducing balance sheet and raising rates), it won’t be any less disruptive.

Economists at Deutsche Bank gave a similar assessment of what this tightening cycle will do. Stock markets in developed countries are already showing “frothiness”, and tightening from the ECB and Bank of England could drive more.

What this means for investors: Check out why Sprott Inc. CEO is staying bullish on gold going forward under these economic conditions. In addition to its inverse correlation to an equity market that could be in trouble, it is a hedge against downturn.


China Introduces Idea of Block Currency

China's new block currency?Further on the topic of cryptocurrency…China is developing its own digital currency. China is trying to move away from cash, and cryptocurrency seems like a desirable option right now. It’s also worth noting that China is the top gold buyer on the global stage right now, and has been shoring up its central bank with physical gold holdings for quite some time. Alternative currencies like gold and cryptocurrency are not as subject to inflation as cash.

What this means for investors: Cryptocurrencies remove exchange rate risk, are universally accepted around the world, and are not susceptible to control by governments and central banks. For individuals, they are an attractive alternative for holding wealth that is independent of  the corrupt and failing financial system. The rise of cryptocurrencies is indicative of a societal rejection of a broken monetary system of fiat money. Ultimately though, gold will always be safer than digital currency because of its tangibility. The elements boosting digital currency are also going to boost precious metals.


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 Here are some articles from the web discussing the topics in this week’s post:

Gold and Cryptocurrency and a New Relationship?

Read Here

Gold Rallies This Week on Fed Announcement and Weak Data

Read Here

Some Analysts See Froth Markets and Recession Fears

Read Here

China Introduces Idea of Block Currency

Read Here


As always, I encourage you to speak with your broker at RME for more market updates. Expert brokers are available Monday-Friday from 9 AM- 5 PM or by special appointment after hours. Call today at  602-955-6500 or toll-free at 877-354-4040.

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