Gold And Bitcoin Could be the Beneficiaries of China’s Woes

gold-china

By Martin Tiller

I don’t know about you, but I am getting sick of hearing about China. It seems that every time any market moves, stocks, bonds, oil – anything – China is given as the reason. It’s beginning to sound more like an excuse than a reason. I mean, does slower than expected Chinese growth justify oil below levels from the depths of the recession? How does lower manufacturing output in China justify a big drop in Lowes Home Improvement stock (LOW), or U.S. utilities?

The one area where the events unfolding in China, however, do have an effect is on Bitcoin, and yet we have heard very little of that from the financial media. In many ways, the type of crisis that China is going through is exactly what Bitcoin was devised to protect against. You have a situation where the normal investments and stores of value for the Chinese people, stocks and gold, are both going through their own recalibration, albeit on different timescales.

Gold has been depressed and deleveraging from its own frothy levels for several years, while the meteoric rise and then collapse of the Chinese stock market has been well-documented. If anything currently in the news justifies use of the now clichéd term “bubble,” it is that market. The problem in many ways for the Chinese is that they have all of the trappings of a free market economy, but none of the substance. The government seems to have deliberately engineered the run up in stocks, but now that the inevitable in free market terms is happening and it is unwinding, their response is to arrest those that they deem responsible.

The one area where the events unfolding in China, however, do have an effect is on Bitcoin, and yet we have heard very little of that from the financial media. In many ways, the type of crisis that China is going through is exactly what Bitcoin was devised to protect against. You have a situation where the normal investments and stores of value for the Chinese people, stocks and gold, are both going through their own recalibration, albeit on different timescales.

Gold has been depressed and deleveraging from its own frothy levels for several years, while the meteoric rise and then collapse of the Chinese stock market has been well-documented. If anything currently in the news justifies use of the now clichéd term “bubble,” it is that market. The problem in many ways for the Chinese is that they have all of the trappings of a free market economy, but none of the substance. The government seems to have deliberately engineered the run up in stocks, but now that the inevitable in free market terms is happening and it is unwinding, their response is to arrest those that they deem responsible.

The principle meddling in the market with ordinary investors paying the price was extended last week when the People’s Bank of China (PBOC) announced a devaluation of the currency. Even those that had been smart enough to get out of the stock market before the bubble burst saw the real value of their savings decline, with the prospect of more to come. In that scenario a virtual currency that cannot be devalued other than by market forces, that can be held anonymously and for which the diminishing rate of supply is known and fixed is pretty appealing.

The obvious question, then, is why isn’t the price of Bitcoin soaring as these events unfold? The average Chinese investor may not be fabulously wealthy by Western standards, but when combined they represent a significant pool of capital that could have an extraordinary effect on Bitcoin, given the market’s total capitalization of around $3.3 billion.

There are, I suspect several reasons. The first is historical. Even before the events detailed above, the problems for Chinese savers were seemingly evident to them. Thus, before the government began to regulate virtual currency on December 5th 2013, we saw the huge run up in Bitcoin with which most are familiar. Once regulation began, however, we saw the collapse. Even now when the Chinese government’s stance is, at least officially, clearer and there is no restriction, in theory, on individuals owning virtual currency, people are only too aware how quickly that can change.

There is also presumably a lack of awareness and understanding of Bitcoin by the average investor. That is a problem for virtual currencies in the West, where free access to the press and the internet is taken for granted. I can only imagine the level of distrust based on ignorance that could be around in a country that restricts and controls news outlets.

Even with all of that, though, you would think that with the stock market still collapsing and exchange controls being imposed, Chinese money would have given some boost to the price of Bitcoin, but BTC/USD has declined over the last month from around $280 to around $230. I would argue though, that given the angst surrounding the fork in the currency and Bitcoin’s problems with its own “flash crash,” that price has actually held up pretty well. That is especially true when you factor in the effect of generalized dollar strength on the currency pair.

Whether that is down to the first trickle of Chinese investors’ money coming into the Bitcoin market or simply a function of the fact that Bitcoin seems to have found a range so far this year is hard to say. Whether it has started yet or not, though, the fact remains that after the stock market has crashed and exchange controls have been imposed, there must be an awful lot of Chinese investors’ cash looking for a home that can protect against any future devaluation of the currency.

Some of that will undoubtedly go into gold given that the collapse seems to have stopped for now, but if just a small fraction is used to buy Bitcoin there will be a significant effect on the market. There is one obvious possible fly in the ointment: the government’s tolerance of Bitcoin ownership is by no means guaranteed to last, and if that changes, the rush to the exits will be pretty scary.

The fact that they have tried to restrict Bitcoin in the past and essentially failed makes that less likely, though, so for now the most likely beneficiaries over time from China’s woes would seem to be gold and Bitcoin.

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