Is Bitcoin a Threat to Gold Mining Stocks?

There’s a very unusual and growing threat to gold miners that’s underestimated and understood. It is bitcoin; the rapidly growing cryptocurrency has emerged as a major rival and threat to gold.

Bitcoin was officially declared a commodity by the US Commodity Futures Trading Commission (CFTC) in September 2015, Bloomberg reported. That makes it an alternative to gold because, like gold it is a store of value that can be traded.

Bitcoin is a menace to gold because it is far more liquid; it can be transferred or sold at the push of app. Unlike gold bitcoin can be used to make direct purchases at websites like Overstock.com, banked via digital wallets, used to buy Amazon and other gift cards and even converted to cash via ATMs.

Bitcoin Booms, Gold Stagnates

That sheer versatility makes bitcoin a dangerous rival to gold. Now it is gaining value far faster than gold is. Over the course of 2015; the price of a bitcoin increased by $536.61, more than 50%, according to Coinbase’s official estimate. A bitcoin was trading at $432.51 on January 2, 2016, and $1,001.98 on New Year’s Day 2017, according to Coinbase.

In contrast the price of a troy ounce of gold increased by $89.90 between December 31, 2015, and December 30, 2016. Gold was trading at $1,063.70 an ounce on New Year’s Eve, 2015, and $1,153.60 at the end of 2016. Bitcoin’s price is also quite unstable it fell to $961.01 on January 5, 2017.

The message being sent to speculators and investors here is clear, if you bought bitcoin in 2015, you might have made around $500. If you bought gold in 2015, your return would have been one fifth that of what bitcoin made.

Gold is stagnating as another far more versatile and easier to buy commodity is booming. That might explain why gold prices only increased modestly in the quarter of 2016. A time that saw financial and political chaos including Modi’s deflation in India, new currency controls in Spain, growing tensions between Russia and the United States, demonetization and hyperinflation in Venezuela, growing tensions between the USA and China and the election of Donald J. Trump as president of the United States.

Nor are doom-saying predictions for 2017 that include a stronger dollar, inflation in the US, a weak pound and an ailing Euro driving investors to gold. They’re flocking to a bitcoin and to a lesser extent the lesser known; but glitzier etherum.

Under normal circumstances gold should have boomed during that period. Investors should have rushed to move their cash into the safety of hard metals. Instead they’re buying bitcoin and it is easy to see why.

The Danger Bitcoin presents to Gold Miners

The danger bitcoin, and other cryptocurrencies, presents to gold miners is obvious. The gold-mining industry’s planning is based on the presumption that there will be a fairly constant and steadily increasing demand for the precious metal.

The presumption of this demand is based on the belief that gold is a stable store of value; and the best alternative to government currencies and traded equities and securities. Well now there might be a better alternative that is easier to buy, sell and trade.

Like gold that alternative serves as an effective hedge against inflation and currency devaluation, as our friend Vinny Ligham has pointed out. More importantly it is a hedge that almost anybody with a little cash; or a credit card, and access to the internet can take advantage of.

An average person can buy bitcoin with her smartphone, and trade it anytime she can get an internet connection. More importantly it can quickly be converted to currency or hard goods if necessary.

People in Venezuela are using bitcoins to buy Amazon gift cards that they use to buy items that are in short supply in that nation. They can have the goods; which include food and medicine, shipped directly to them. Once they get the stuff, the Venezuelans can eat or use it, or sell the items they buy for cash.

Bitcoin is a Double Hedge

This makes bitcoin a sort of double hedge, it can be used to store value, or converted into physical goods or credit that can be used to buy physical goods. That gives it an advantage over gold coins which can only be traded to the black marketer, or easily confiscated by the local secret policeman.

This might explain why gold prices have not increased greatly; even though Prime Minister Modi effectively wiped out the value of 86% of the cash in India – the world’s largest gold market – with demonetization. The money; like all the cash trapped in China by currency controls, is going elsewhere perhaps to bitcoin.

A related problem is that governments, or at least that in China, seem to be encouraging, or at least maintaining a blind eye, to the bitcoin trade. One reason for that is the Chinese government might think the added buying power and wealth from all the bitcoin its’ citizens have been purchasing is a valuable asset. Another is the People’s Bank of China which is trying to develop its own cryptocurrency.

Do Gold Miners have a future?

All this calls the future of gold miners, many of which are already struggling with falling revenues, into question. What do these capital-intensive companies do when demand for their product simply collapses?

A disturbing possibility raised by the latest financial numbers is that many of them will collapse. The available data indicates that gold miners are in serious trouble and that trouble is about to get worse thanks to bitcoin.

Some gold mining stocks to avoid:

• Barrick Gold (NYSE: ABX) – Revenues at this Canadian miner have dropped by $5.253 billion in the last three years. As recently as September 2013, Barrick raked in $13.73 billion in revenues, in September 2016 reported $8.477 billion. That led to a negative income of -$2.392 billion, a return on equity of -30.68% and an earnings per share (EPS) figure of -2.05 for third quarter 2016.

 

• Goldcorp (NYSE: GG) – The turnaround at the other big Canadian gold producer is definitely over. Goldcorp saw its revenues shoot up from $3.493 billion in September 2014 to $4.138 billion in September 2015 then collapsed to $3.684 billion in September 2016. Like Barrick, Goldcorp was certainly ailing with an EPS of -5.09, a net income of -$4.21 billion and a return on equity of -30.49% for third quarter 2016.

 

• Newmont Mining (NYSE: NEM) – This American miner experienced a definite turnaround in 2016. Its revenues grew from $7.457 billion in September 2015 to $8.957 billion in September 2016. Despite that Newmont still delivered an EPS of -1.03, a net income of -$537 million, a profit margin of -19.99% and a return on equity of -4.73% at the end of third quarter 2016.

This sampling shows that the gold-mining industry is already in deep trouble. My prediction is that worse pain is yet to come courtesy of bitcoin. Instead of recovery gold miners face low prices and complete collapse in 2017. Expect some terrible earnings reports for gold miners that will send their shares plummeting in January 2017.