Is legacy banking legalised fraud?
However, crypto’s vices pale in comparison to legacy finance.
Every so often, we’re reminded of the failings of the traditional financial system; and today is one of those days.
Last night, news broke that JPMorgan had to pay a total of $920 million in penalties in connection with schemes to manipulate and defraud precious metals and US treasuries markets. US regulators investigated the company for unfairly manipulating or “spoofing” the precious metals markets, with the charges against JPM being for “manipulative and deceptive conduct and spoofing that spanned at least eight years and involved hundreds of thousands of spoof orders in precious metals and U.S. Treasury futures contracts.”
The charges implicate former Deutsche Bank AG traders for a classic bait and switch tactic by placing orders that they never intended to execute, then cancelling them in order to mislead other traders.
Such stories aren’t at all uncommon in pretty much all financial markets and the regulated legacy financial system is the biggest player in this regard. Indeed, whether it’s Deutsche Bank’s facilitation of $2 trillion worth of money laundering, Danske Bank’s endless fraud saga, or any other seemingly reputable institution, they’ve all got skeletons in their closet and are ultimately, all cut from the same cloth.
However, now that Kraken exchange has filed to become the first special purpose depository institution (SPDI) bank in the US, all might not be lost for legacy banks.
Needless to say, bitcoin is a way to exempt yourself from institutionalized fraud; and I say this as someone who recognizes bitcoin as an unstoppable technology, not as some kind of mindless vacuous avocado posing as a disgruntled revolutionary.
Like a baby brother waiting for his elders to commit to the decisive move, bitcoin is seemingly waiting for legacy markets to choose a path. As such, we’ll look more closely at traditional markets this time around.
DXY dangles outside macro market structure
On the daily time-frame, the DXY (USD index) has corrected slightly from the 94.80 region towards the 20-daily ema. Currently, the DXY is dangling outside macro market structure as it finds resistance at the 20-weekly EMA. Spending too much time in this region might push the index towards lows not seen since 2018, with the macro pivot point being the 88.67 level.
Zooming out, the index has technically already broken market structure to the downside, so follow-through should be reasonably expected in the coming weeks to months. This narrative is compounded by ongoing quantitative easing and stimulus measures led by the United States, and followed-up by similar moves from secondary markets in Japan, Europe, the UK, etc.
Meanwhile, another round of stimulus for Americans is also expected to pass Congress before the US election on November 3rd. When seen in context of the Federal Reserve’s major policy change that will allow official inflation figures to overshoot 2% targets, then an emerging pattern lines up nicely with a falling DXY.
Gold nears “bounce territory”
As gold grinds upwards, the precious metal has experienced a minor setback as it trades between the 20 daily-ema (resistance) and the 20-weekly ema (support). Notably, the trend is inversely related to the DXY, as one would expect. Typically either chart is more or less inversely correlated to the other, and with good reason.
While gold has not developed any meaningful divergence on the Relative Strength Index (RSI), the precious metal is trading close to oversold territory on the daily time-frame. The last two times this happened, the metal rallied 50% (in 57 days) and 43.6% (in 143 days), respectively.
While it’s conceivable for gold to move towards lower targets closer to the 200-daily ema, there’s little evidence to suggest this both technically and fundamentally, for the reasons just explained.
This is to say that gold seems closer to ‘bounce territory’ than it is to having a major trend shift. Should the precious metal find its footing and regain momentum above the 20-daily ema, then fresh highs should be expected. This would undoubtedly carry silver and bitcoin along for the ride, with the latter probably outperforming both by miles.
Indeed, when seen in the context of the best performing asset last decade, the sobering reality is that bitcoin is more accessible and never-seen-before technology, unlike gold. In fact, markets are in the process of testing the “physical use case” versus “absolute or relative scarcity” arguments, and I suspect scarcity will completely dominate the discussion.
Bear in mind that the world has never known or easily monetized absolute scarcity, let alone absolute digital scarcity. This is an extremely powerful fact in addition to other benefits bitcoin has over gold.
M2 money supply resumes its parabola
Meanwhile, the M2 money supply, which is the total value of money available in the US economy at any point in time, has resumed its parabolic trend. The question here is whether there are enough dollars to service USD denominated debt in the world. Deflationary economists like Raoul Pal believe there are not, but when seen in the context of today’s technology, it could be argued that central banks have become much more efficient in their money printing capabilities.
Indeed, the stock market recovered just like Trump said it would and in record time — a V-shaped recovery. This was only achievable due to the relative lightning speed at which dollars entered circulation, giving markets a chance to service debts much faster due to increased efficiency.
Bitcoin continues to range, seeking a directional signal
Meanwhile, bitcoin remains within the upper half of its trading range between $11,195 and $10,000 (adjusted). Since the macro picture will play a directional role, the lower-time frame low carries less weight here, hence the range adjustment.
Bitcoin has tested the 4-hour LTF pivot at $10,581 six times since flipping it into support. As it happened, a modest bullish divergence developed but has since been rejected at the $10.8k level as indecision grips the market.
As bitcoin meanders in this range much like a stablecoin, the crypto’s dependency on traditional markets is clear; and while sustained price-action above the 20-weekly ema should be seen as bullish, there’s always a possibility for the bearish scenario to take over should legacy markets tank.
As it stands, traditional markets will probably react strongly to events surrounding US elections, which would in turn impact bitcoin’s price-action short of a major decoupling event that would send bitcoin off to the races.
In the event of a ‘double bottom’ structure playing out, then a rapid move to reclaim $11,000 would put bulls back in the driver’s seat, opening the door to the 2019 $14,000 high in the 4th quarter of 2020.
On the flipside, a deeper correction across traditional markets will probably drag bitcoin down towards the $9,000 level before a bounce could be reasonably anticipated.
Ideally, bitcoin decouples and does its thing, but until that happens then historical precedent works against this thesis, despite the wealth of institutionally bullish news emerging over the weeks.
Catch you next time.