What next for bitcoin? The path of gold in the 1970s may hold the answer, strategist says

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Bitcoin BTCUSD, +7.20% tumbled on Sunday, hitting a 24-hour low of $31,227 — more than 50% below its mid-April peak of $64,829. It comes amid environmental concerns over the mining of bitcoin, raised by Tesla TSLA, -0.29% Chief Executive Elon Musk, and a crackdown by China on the sector. The world’s No.1 crypto stabilized on Monday, trading close to $38,000.

Our call of the day comes from Michael O’Rourke, chief market strategist at JonesTrading, who says gold’s “speculative” gains in the 1970s may offer investors an insight into the future path of bitcoin.

Bitcoin’s rally, climbing 500% from October to its April peak is “easily one of the most historic bull runs in financial history,” O’Rourke said in a note on Sunday, adding that the rally was driven by a lack of trust in federal governments and their spending practices.

The path of gold GC00, 0.55% in the 1970s can be seen as a historical parallel, he said, and may provide a “road map” for the cryptocurrency.

He noted that it was also a time of distrust in the government and of high inflation — three or four times current levels. Then in 1971 President Richard Nixon ended the fixed exchange rate for gold of $35 per ounce. After going nowhere for four decades, gold surged and by January 1980 it had hit $850 per ounce. 

“Subsequently, history has proven that a large portion of gold’s move in the 1970s and early 1980s [was] simply speculative,” O’Rourke said. Gold plummeted below $300 per ounce later in the 1980s. It wouldn’t climb back above $850 until 2008, as O’Rourke notes investors came back to gold during the financial crisis for the same reasons — central banks printing and dysfunctional governments. The commodity’s 45% decline from its 2011 peak to its 2016 trough, opened the door for bitcoin to take over as the “new proxy for dysfunctional governments and central banks,” he said.

The “novelty” of gold’s re-engagement with market dynamics in the 1970s environment created a “perfect storm of positivity for the asset.” The same novelty provided bitcoin with a similar story line for “speculators to embrace amidst the pandemic fears” and fiscal and monetary stimulus, he added.

So where does that leave bitcoin? 

O’Rourke cited Warren Buffett’s comments on gold when it was peaking in 2011, as he warned against “assets that will never produce anything,” but are purchased in the hope that someone else will pay more for it in the future. That summary “almost perfectly matches what we have witnessed from bitcoin over the past seven months,” the JonesTrading strategist said. 

“Gold still has a couple of millennia of history as a store value going for it, bitcoin’s environmental drawbacks should prove too large to overcome. The ESG [environmental, social and corporate governance] concerns have reversed the cryptocurrency just as the feared inflation is materializing,” he added.

The tweet

China announced a crackdown on commodity price violations on Monday, as it blamed rising prices on “excessive speculation,” sending metals lower.

The markets

U.S. stocks DJIA, -0.24% SPX, -0.21% COMP, -0.03% made substantial gains in early trading on Monday after a second consecutive losing week for the S&P 500 SPX, -0.21% last week. European stocks SXXP, 0.24% edged lower but remained close to record highs, although German and Swiss markets were closed for the Whit Monday holiday.  

The buzz

A high-profile opponent of Belarusian President Alexander Lukashenko was arrested on Sunday after a Ryanair RYAAY, -0.29% flight he was on was diverted to the country. A number of Western countries criticized the move, with European Commission President Ursula von der Leyen calling it “unacceptable.”

Cabot Oil & Gas Corp. and Cimarex Energy Co. said on Monday they have agreed to an all-stock merger of equals in a deal with an enterprise value of about $17 billion.

Nearly 150 people were arrested after raucous celebrations on a Southern California beach on Saturday, after a birthday party invitation went viral on TikTok.

Phil Mickelson won golf’s PGA Championship on Sunday, and at the age of 50 became the oldest major winner in the sport’s history.

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