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Gold and Bitcoin: Speculative Assets, Not Stores of Value

By Alex Dumortier, CFA – Feb 19, 2014 at 10:15AM

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Gold and bitcoin are speculative assets.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. housing starts recorded their largest percentage decline (-16%) in nearly three years in January, the Commerce Department said on Wednesday. The two-thirds decline in the Midwest suggests cold weather was a factor, but concerns that housing was weakening anyway did not seem to be weighing too heavily on U.S. stocks Wednesday morning. The benchmark S&P 500 and the narrower Dow Jones Industrial Average (^DJI 2.18%) were up 0.27% and 0.53%, respectively, at 10:15 a.m. EST.

Gold, which suffered its worst annual performance in nearly three decades in 2013, has bounced back this year, with the SPDR Gold Shares (GLD 1.28%) up nearly 10%. Last Friday, gold futures broke above their 200-day moving average for the first time since Feb. 11, 2013. Bespoke Investment Group, which is always producing arcane market statistics, noted that this is only the fourth year-plus streak during which the price of the yellow metal has traded below the 200-day moving average.

"Gold has been acting well all year, and the fact that it has now moved above its 200-day is another good sign," Bespoke said. On Monday, UBS issued a note saying that gold will establish a new trading range above $1,300, as U.S. investor sentiment toward the metal has thawed.

Perhaps these observations make sense -- if you're a trader. Take Bespoke Investment Group's statistic, for example. The other instances of this year-plus streak took place in the first half of 1998, October 1989, and August 1982. While it may have been possible to make some money following those periods by darting in and out of gold, it did not alter the fact that gold was -- during each of these periods -- in a bear market that would ultimately stretch two decades. The bull market that followed likely peaked in September 2011, with gold breaking above $1,900 per ounce. We're now back in a bear market, one that will probably last for years -- if you put money into gold now, you're fighting a huge long-term trend.

As monetary authorities in the U.S. and Japan have ramped up their printing presses, gold isn't the only alternative currency that has attracted investors' interest. Just as the supply of gold is limited by mining production, that of the electronic currency is set by a computer algorithm, rather than a policymaker's wand (at some stage, no additional supply will be created).

Bitcoin is intriguing and it -- or one of its competitors/successors -- does have the potential to upend traditional forms of money transfer and other aspects of our financial system. Nevertheless, Bitcoin's novelty, combined with a core of fervent "get-rich-quick" types have fostered the conditions for a bubble. Indeed, the dollar price of a bitcoin has exploded over the past couple of years. However, its price progression has far surpassed the rate of development of the infrastructure that supports it -- not to mention the legal and regulatory framework in which it exists.

Consider, for example, Mt Gox, the oldest and, for a time, most popular Bitcoin exchange. On Monday, Bitcoin prices on Mt Gox fell to half the rate on other exchanges, as users continue to struggle to withdraw their holdings. The Financial Times reported that a protester in front Mt Gox's headquarters has 460 bitcoins held with the exchange -- worth approximately $300,000! The man's quote to the FT offers a stark warning:

I'll start to feel a little less sick to my stomach if I can get the cash. For now, what scares me is that the only thing I have to prove ownership [of Bitcoin] is a screenshot, or a CSV file. I can just imagine myself in a Japanese court, asking them if I can have my virtual Pokemon cards back. [Note: Mt Gox was originally established as a trading card exchange.]

If you can't access your assets, what sort of store of value is that? At this time, Bitcoin is an entirely speculative vehicle, and while it may become something greater eventually, investors are best off steering well clear of this virtual currency.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
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SPDR Gold Trust Stock Quote
SPDR Gold Trust
GLD
$164.81 (1.28%) $2.08

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