Consumables Substitution Effect – As the price of a good increases, the demand for its substitute rises
The substitute effect under everyday circumstances is straightforward and makes perfect sense. When we have the choice of consuming a number of goods; whether it’s cans of beans, soda, or clothing, as the prices of one or more of the choices rise, the consumer will be more likely to consume the competing choices, ceteris paribus.
Investment Substitution Effect – As the price of an asset falls, the demand for its substitute often rises
However, humans can be rationally irrational when it comes to buying investments, and this relationship is often the other way around; many investors tend to demand more of an investment as its price rises. This is often at the expense of its equivalent substitutes, which will often fall in value on a relative basis. Intuitively, the reverse makes sense, too; as the price of an asset falls, the demand for its substitute often rises.
Of course, we can never know for certain whether bitcoin and gold are perfect substitutes for one another, but if we view their behaviors through their recent market action in the wake of the promulgation of the now ongoing post-COVID central bank monetary intervention, we do possess more empirical data and observations that this is most likely the case. Moreover, we can rest assured that the powers-that-be also know this and have purposely established this relationship with its inculcation to the masses via the business media.
This blog had theorized since 2016 that btc was developed and released by dark intelligence simultaneously with the introduction of QE in 2008-09 as a tool to suppress the price of gold. And while we can never know for sure that this is the case, we can investigate and observe over the longer-term to determine if this relationship is valid.
While the price action of Au and btc over the longer term are positively correlated, and will trend upward in tandem with the increases in the money stock measures around the world, I suspect that Au (and Ag) will not rise as quickly as long as btc is around and being heavily promoted by the MSM.
However, from time to time, we do see how the prices of Au and btc play off one another over the shorter term, and if recent price performance is any indication, these assets are highly related investment substitutes. While this relationship may not matter to some people, I view it as an important one when it comes to trading both of them in the short and intermediate term, and in a linear environment.
I mean “linear” in the sense that this relationship is stronger when the markets are operating as usual and volatility measures are lower than normal or typical. However, from time to time both investments may drop in value together if we have that proverbial “Minsky moment,” which forces investors and traders to cover and liquidate from any unforeseen market event, whether it be endogenous or exogenous. A Fed tapering pronouncement is one example. We also observed that the manufactured COVID crisis was another instance.
But it does seem that when the market for btc suffers adverse circumstances, gold responds more favorably. It also seems that this relationship works best when circumstances affect the price of btc, rather than when circumstances affect the price of gold.
Keep in mind that often when the price of an asset falls, it can have a sympathetic response with its equivalents. Investors experience this often with the stocks of companies in the same sector. But I am confining this commentary to within a particular sector, and that is of assets that are considered monetary equivalents and stores of value.
Long-term successful traders recognize these relationships in action. Contrarian investors leverage these opportunities for long-term gain.