JANUARY 2018 MARKET REPORT

Bitcoin Is Nearing a Bubble Top, While Gold Is Growing Steadily

In late October 2017, the Chicago Mercantile Group (CME), the world’s biggest exchange group, said that it plans to launch a futures contract for bitcoin, a worldwide cryptocurrency and digital payment system, by the end of 2017—a very fast-track launch. At the time of that announcement, bitcoins sold for $6,000 each, but the price of bitcoins soared 20% in the next two days, surpassing $7,300. Novice investors are looking at bitcoin as a replacement for the historical role of gold, but they can take a lesson from long-time gold bugs about how “bubbles” are created.

In August 1974, shortly after United States President Richard M. Nixon resigned, his successor, President Gerald R. Ford, signed a bill allowing Americans to own gold by the end of 1974. In the intervening months, foreign buyers poured money into gold, doubling its price from $95 per ounce to $197 per ounce. But on Dec. 31, 1974, foreign sellers unloaded their gold on American buyers. The price of gold plummeted $45 in a week and fell to $103 by September 1976. Gold did not reach its 1974 high for four years. By 1980, long-term holders of gold were rewarded, but speculators were washed out by gold’s first bear market decline of 1975-76.