Talking Numbers

Why Bitcoin and gold are at the mercy of the Fed: Strategist

Bitcoin and gold at mercy of Fed: Strategist

Just as quickly as it went up, it's now coming down.

That's what's happening to Bitcoin right now. After peaking around $788 on Monday, the digital currency dropped below $600 by Tuesday morning before making a failed test of its $752 close by noon on the US East Coast. At the start of 2013, it was trading around $13.

Bitcoin's volatility was recently addressed by Patrick Murk, General Counsel to the Bitcoin Foundation. Speaking before the US Senate's Committee on Homeland Security and Governmental Affairs, Murck said:

"It's very much an experimental currency and it should be considered a high risk environment for consumers and investors at the moment."

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Fans of Bitcoin say its strength is in its finite supply (in theory, at least), something that could serve as an inflation hedge should, say, a central bank begin printing money wantonly. That of course is one of the chief arguments of gold.

One thing that separates Bitcoin from gold, however, is how one person views it. No less that Federal Reserve Chairman Ben Bernanke seems somewhat receptive to the idea of the virtual currency concept. Writing to the US Senate, Bernanke says:

"…While these types of innovations may pose risks related to law enforcement and supervisory matters, there are also areas in which they may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system."

Contrast that to Bernanke's testimony before Congress two years ago. When then-Representative Ron Paul asked the Fed Chief if gold was money, Bernanke answered, "No, it's a precious metal" and likened it to other assets such as US Treasury bonds.

But, there are some other similarities between Bitcoin and gold besides limited supply.

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"Both Bitcoin and gold are outside of a central bank," says CNBC contributor Andrew Busch, editor and publisher of The Busch Report. Yet that doesn't mean they operate independently of central banks.

"They still are at the mercy of a central bank," says Busch. "As the Federal Reserve is talking about tapering and raising interest rates, two things happen: 1) the US dollar strengthens, so that hurts Bitcoin and; 2) gold starts to fall because, obviously, the US dollar strengthening and higher rates draw money towards that and away from gold."

Yet, according to Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, there are more apt comparisons for Bitcoin than gold. "[Bitcoin] is more of a traditional bubble, like the Tulip Mania out of Holland or the South Sea or even tech stocks from the late-'90s, which had a similarly-parabolic 99% rise and 85% fall," says Ross. "I don't see that in gold. What I see is just more of a traditional downtrend."

Ross sees gold right now at a key technical level. Depending on its moves in the near future, it can dictate whether the yellow metal moves decisively in one direction or another.

To see Busch and Ross analyze the similarities and differences between Bitcoin and gold – and to see Ross' charts on what's next for gold, watch the video above.

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