Readers have seen us previously comment on the developing Bitcoin-crypto phenomenon. And our clients know that we are not investing in crypto today but are watching this carefully. Our clients also know we have a position in a gold-miner ETF. Our email from clients, media, and readers has the Bitcoin versus gold argument and the evolution of crypto at the top of the topic list. There is a lot of buzz.
The buzz is not surprising when a new financial element appears whose price fluctuations can be $1000 in a week. Interest in Bitcoin and crypto in general is expanding at an exponential rate, and the range of opinions for crypto can fill a chasm. At one extreme is the "tulip mania" assessment of crypto. We discussed it last month. See: http://www.cumber.com/tulip-fever/. On the other extreme are forecasts that crypto will replace gold as a reserve and that the ultimate Bitcoin token price level may reach $50,000. We are highly skeptical but realize that our skepticism may be a product of age and experience. Maybe we are guilty of a Luddite mentality.
We are also watching the development of the gold-backed-crypto alternative. We think that is a significant direction that blockchain transactions will take. We wrote about that recently. See http://www.cumber.com/bitcoin-gold-money/.
A perceptive reader asked about the relationship between President Trump's activities and the gold price. This question was posed in the context of the developing global crypto-gold nexus that we are seeing with the introduction of the Sharia-approved, gold-backed cryptocurrency. The reader struck a chord.
So, we set about examining the relationship of presidential approval ratings and the gold price. There is no history regarding a correlation between presidential approval ratings and the cryptocurrencies, since the only data points are very recent and were mostly established in the Trump administration era, which is only one year old. There is no way to know if the rise in crypto attention originates in a worldwide reaction to the dwindling approval of Donald Trump as a world leader. We can debate this question as a political matter from all points of view, but we cannot find any historical evidence on which to base a solid conclusion. Crypto is just too new.
We can find some solid evidence when we examine the gold price.
Readers are reminded that gold was priced at $20 an ounce a century ago. The "double eagle" was the largest-denomination gold coin. In the Depression era the US government altered that price and restricted the ability of our citizens to own gold. See https://en.wikipedia.org/wiki/Executive_Order_6102.
Under the Bretton Woods (https://en.wikipedia.org/wiki/Bretton_Woods_system) fixed-currency regime, established in 1944, the United States, under President Franklin Delano Roosevelt, agreed to a fixed exchange rate of $35 per ounce of gold, and we settled international transactions with intergovernmental gold exchanges at that price. This agreement defined the operational structure until 1971, when President Richard Nixon closed the "gold window" and reneged on the previous US pledge. The US raised the official price to $42, but that meant nothing, as transactions ceased. See https://en.wikipedia.org/wiki/Nixon_shock.
As Nixon's presidency deteriorated, the gold price on world markets tripled. Thus the Nixon era is the first case study that can be examined in response to the question posed by our reader. The second case study involves President Bush the younger. Bush Jr. also faced a period of deteriorating approval that correlated with a noticeable gold price change.
These are the only two case studies that have some statistical basis; they are a very limited data set.
We have boiled this exercise down into three slides with help of Cumberland's Tom Patterson. The link to the three slides, in PDF form, is http://www.cumber.com/pdf/GoldApprovalWebsite.pdf.
The first slide shows all the presidential approval ratings from Richard Nixon to present. Note how most presidencies start off with higher approval ratings, which decline with time under most circumstances. Also note how Donald Trump's starting point is lower than others, and note how his decline has been persistent. The persistence of decline is not unusual in history, but the rapidity of Trump's decline is an outlier in history. Trump's starting point is lower than for the other cases in this study. Of the nine presidents in the study, and at this point in time in his presidency, Trump is clearly the least approved. Note that the rate of change of deterioration is intense.
Readers may also note that the reasons for approval declines are not listed – we are going strictly on the numbers. The reasons may be the subject of discussion and debate, but for the purpose of this analysis, we ignored them. Whether it was Jimmy Carter and Iran’s detention of Americans or Donald Trump's nasty tweets and belligerent behavior, the causal nature of approval decline was ignored. It isn’t why approval declined that matters; it’s the decline itself. The approval numbers are sourced from the American Presidency Project and Gallup data. The gold price data is from Bloomberg.
Chart two shows the Nixon shock and the change in the gold price at that time. The depiction of gold prices is scaled vertically so that readers can see the rates of change in the gold price as opposed to its absolute level. Thus a gold price move of $80 to $160 has the same visual impact and spacing in the chart as a price change from $160 to $320. The horizontal axis is approval ratings over time, falling from left to right.
In chart two we observe that the approval rating of Richard Nixon worked its way down below 40% and then accelerated downward as the Watergate scandal unfolded. Concomitantly, the gold price doubled. After Nixon resigned, gold traded at a range-bound level throughout the Ford and Carter administrations and until the very end of the Carter period, when the gold price rise became pronounced and accelerated.
The third chart shows the approval ratings of Reagan, Bush Sr., and Clinton. Gold was again broadly range-bound while presidential approvals fluctuated above the 40% threshold. Only when Bush Jr. became unpopular did we see his falling approval coincide with a steeply rising gold price. Why this happened is a subject for political speculation, but the statistical events are clearly observable in the data.
Under Obama and Trump, gold has again been range-bound and approval ratings have fluctuated in the same 40%+ levels as in previous range-bound periods. But now President Trump's approval level is falling below the threshold that has previously marked a significant gold price rise. That trend raises the specter of another upward price shift in gold. However, this time there is a cryptocurrency alternative to gold that didn’t exist in the other two case study periods.
So, we don’t know how much of the gradually rising uptrend in the gold price that has occurred in the last two years is related to presidential approval ratings for Obama and Trump. And we don’t know how much the cryptocurrency price increases originate from crypto substituting for gold. Maybe it is some of each.
We do know that there are movements in some official gold transactions. We have seen transactions reported by Turkey. (See http://www.barrons.com/articles/gold-a-loser-despite-turkeys-mysterious-demand-1509736352.) And we have seen official sales by Venezuela, which is desperate for liquidity. We are also watching China increase its gold reserve holdings. We know that the collective central banks of the world have increased their assets to about $22 trillion USD equivalent; and even though the Fed is now starting to shrink its balance sheet, combined central bank asset growth is running at about $300 billion per month. (Sources: Bloomberg and hat tips to Dennis Gartman, Mark Grant, and Ed Yardeni.) We know that those reserve additions are mostly in fiat currency asset denominations, very little in gold, and not in crypto at all.
Let’s segue to the crypto-gold debate.
With permission, we are extensively quoting Nick Colas and Jessica Rabe from their newsletter. We know their excellent work from previous affiliations and are delighted to see them venture into this newly launched service. Readers are encouraged to give it a try. Their website is http://datatrekresearch.com/.
Regarding Bitcoin and gold they wrote:
"Physical gold is the world’s oldest store of value; bitcoin is a baby-faced newcomer. But the two have many common features, such as limited supply, efficiency/portability, and privacy. Bitcoin has a long way to go (about 5,000 years) before it can match gold’s success, of course. Gold has a different but equally important challenge – maintaining its relevance in an ever-more digital world.
“That’s what makes the whole bitcoin vs gold debate so interesting. A long-time incumbent and a new kid on the block, competing for attention. It’s not quite the Rumble in the Jungle, but close enough.
“We looked at Google Trends, which counts the number of searches for key words, to see the relative interest in “buy gold” and “buy bitcoin” to see which asset is more popular around the world. Google searches should be a reliable indicator of purchase intent, or at least interest.
“Here’s what we found:
“• On a worldwide basis, “Buy bitcoin” is a more popular search than “buy gold”. The crossover happened in mid-May of this year. As of today, bitcoin Google query volume is 17% higher than that for gold on a global basis.
“• Google Trends also allows you to zero in on what countries search more for bitcoin than gold. Over the last 90 days, for example, bitcoin beats gold across all of Europe and Russia. Even gold producing countries like South Africa and Canada show more bitcoin searches than for gold.
“• Based on Google searches, the United States is undecided on the bitcoin-gold debate. Search volumes are similar over the last 90 days. They do, however, show regional biases. Bitcoin wins in New York, Illinois, and California, for example. Gold still holds the lead pretty much everywhere else.
“The upshot of this analysis: in just a few short years bitcoin has caught up with gold in terms of global interest. Does that mean it has the staying power of gold? Of course not. It needs about 4,995 years to get there.
“Our perspective on this debate: both bitcoin and gold serve a similar purpose, namely to provide investors with a liquid asset outside the global banking system. If that’s your thing, there’s no need to choose one over the other.”
Many thanks to our brilliant reader who triggered today's discussion with a sharply perceptive question. And many thanks to Nick and Jessica for permission to quote their research work. Please note that they will be present at the GIC discussion of crypto on January 12 in California. For details see the GIC website at www.interdependence.org. You will find the date listed under coming events. Registration is about to open. The meeting will feature Boston Fed president Eric Rosengren. A special conversation with Harry Markowitz is also planned, along with the discussion of crypto.
Only time will reveal the answer to our reader’s question about Trump’s approval rating and the gold price. If Trump’s approval deteriorates further below 40% and if gold rises in price, the history we documented with the Nixon and Bush Jr. eras will be repeated and validated. As for the effect on gold of crypto substitution, that remains impossible to determine today.
At Cumberland, we do not hold any Bitcoin or other crypto positions for our clients. We do have clients who are speculating in cryptocurrencies on their own. They have told us they are doing it. We wish them well.
We continue to maintain a small position in the gold-mining ETF in our US-based ETF portfolios. And we continue to hold some cash reserve in the US portfolios. We are not fully invested.
Of course, any of those decisions and strategies may change at any time.
David R. Kotok
Chairman and Chief Investment Officer
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