Bitcoin and Stock in a massive bubble, but gold's bull market will continue

Bitcoin jumped to another all-time high on Wednesday, just two days after registering its biggest one-day decline since March.

The world's largest cryptocurrency advanced as much as 6% to $35,842, surpassing the previous high of $34,792 set on Jan. 3. It plunged as much as 17% on Monday. The digital coin quadrupled in 2020.

A range of factors have been cited for Bitcoin's ascent, showing how hard it is to pinpoint the proximate cause for the latest bout of volatility. Some traders pointed to a JPMorgan Chase & Co. long-term price forecast of as much as $146,000, while others cited the overall risk-on mood in global financial markets.

While some argue that the cryptocurrency offers a hedge against dollar weakness and inflation risk in a world awash with fiscal and monetary stimulus, others say retail investors and trend-following quant funds are pumping up an unsustainable bubble.

Australian market analyst Kyle Rodda said Bitcoin's latest surge is "knocking over record high after record high right now," but he brings the price surge down to "a high degree of mania".

"Bitcoin's price action is exhibiting bubble-like characteristics, similar to what was seen in the 2017 crypto boom," Mr. Rodda told news.com.au.

"The rally over the last fortnight has been extreme and looks very little to do with changes in market fundamentals," he added.

"We're in a very hot market right now, and I suspect that Bitcoin has once again become something of a speculators plaything."

Long-time market bear David Rosenberg is warning investors the stock market and bitcoin are massive bubbles.

"Based on our stock market valuation work, we are anywhere from 20% to 30% overvalued based on a whole bunch of different metrics," the Rosenberg Research president said.

Rosenberg, who served as Merrill Lynch's top North American economist from 2002 to 2009, is known for his pessimism over the past several years. In 2019, he told investors a recession was virtually unavoidable.

He toned down his market negativity last Spring on "Trading Nation" — asserting he didn't hate stocks because the Federal Reserve's unprecedented support could last for years. The key right now, according to Rosenberg, is to be vigilant.

'Probably not going to burst any time soon'

"What's holding the boot together is basically zero interest rates. As long as rates remain where they are, unless we have a real dramatic pullback in economic activity, this bubble that we're in is probably not going to burst any time soon," he said. "We have to understand though we are investing in a bubble."

The major indexes are starting 2021 in record territory. The S&P 500 and Dow closed at all-time highs on Thursday, surging 16.3% and 7.3%, respectively, over the past year. The tech-heavy Nasdaq missed a new record high by a hair but had its best year since 2009 — up almost 44%.

Rosenberg is also avoiding bitcoin, which also just completed a monster run. It crossed $30,000 for the first time over the weekend and closed 2020 at record highs. The cryptocurrency jumped 305% this year, for its best annual performance since 2017.

"The parabolic move in bitcoin in such a short time period, I would say for any security, is highly abnormal," said Rosenberg, who considers it the biggest market bubble right now.

"What I want to do actually in the context of this bubbly stock market is invest in the areas that are not bubbly and that have a lot of catch-up potential," he said. "They do exist."

But there is an exception: Gold, which just completed its best year in a decade. Rosenberg views it as a safe haven asset.

"It has 1/5 of the volatility that bitcoin does," Rosenberg said. "I've been very bullish on gold, and I remain bullish on gold."

The world economy will be exiting the pandemic weighed down by much bigger debts and increased inequality that could hobble growth in the longer term.

Global debt rose by more than $15 trillion last year to a record $277 trillion, equivalent to 365% of world output, according to the Institute of International Finance. Debt from all sectors -- ranging from household to government to corporate bonds -- surged, based on data from the Washington-based IIF, which is comprised of the world's leading financial institutions.

Photo: Bloomberg

Even before the pandemic, the U.S., China and many other countries were experiencing rising inequality and increasing debt. As the coronavirus crisis eases, those two tendencies could combine to present problems for the global economy.

Covid-19 has "exacerbated inequality markedly, which also raises the issue of financial fragility," said World Bank chief economist Carmen Reinhart.

Many lower-income U.S. households, for example, hold a lot of debt and could find themselves squeezed as temporary moratoriums on mortgage and rent payments end, she said.

Actually, the issue of financial fragility can support gold in the medium and long term.

Not only are analysts bullish on gold as central banks maintain ultra-loose monetary policy through 2021, but rising inflation pressures due to economic recovery in the second half of the year are expected to keep real interest rates in low to negative territory.

Bank of American was the biggest gold bull among financial institutions. In April, as central banks and governments around the world let loose unprecedented amounts of liquidity into financial markets, Bank of American said they saw gold prices going to $3,000 by the end of 2021.

Since then, the bank has walked back its April forecast; however, the commodity analysts remain fairly bullish on the precious metal, seeing gold prices average next year around $2,063 an ounce. 

"As the global economy opens up, gold faces more challenges, making it tricky to hit $3,000/oz; that said, the ongoing fiscal and monetary stimulus should push the yellow metal above $2,000/oz again," the bank's analysts said in its 2021 outlook report.

Leigh Goehring, the managing partner at Goehring & Rozencwajg Associates, said that he is expecting gold prices to push to $3,000 an ounce.

"2021 will be the year that investors believe that there is going to be a return of inflation. We haven't experienced anything like that for 40 years. At some point in 2021, it will happen. This is when the next leg of the bull market will take off," Goehring said. "With all this money printing we've gone through in 2020, next year will be the year we are all disabused of the notion that we can print money without consequences. Gold can go through $2,100, and we could possibly challenge $3,000."