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Cattle Commentary: Cattle futures finished the session mostly higher, though well off of the highs for fats and feeders. April live cattle finished the session up .275 at 124.90, trading in a range of 1.325. March feeder cattle finished the session up .225 at 146.95, trading in a range of 3.325. Friday afternoon we got some new news across the wires in the form of cash trade and the Cattle on Feed report. The bulk of cash trade was reported at 127 and 200 dressed, this was up 4 and 5 respectively. Majority of market participants we spoke with were expecting to see 126. Fridays Cattle on Feed report showed the following:

 

Cattle on Feed: 108

Range of Estimates: 107.2-108.1

Average Estimate:107.7

 

Placements: 101

Range of Estimates: 93.3-100.3

Average Estimates: 96.9

 

Marketing’s: 99

Range of Estimate: 97.9-100.3

Average Estimate: 98.6

 

This afternoons boxed beef prices were up slightly.

PM Boxed Beef / Choice / Select

Current Cutout Values: / 206.83 / 201.83

Change from prior day: / .06 / .51

Choice/Select spread: / 5.00

 

Cattle Technicals

Live Cattle (April)

April live cattle futures finished gaped higher to start the week, marking the high print in the opening minutes as price action fizzled out for the remainder of the day. The overall price action for the session was neutral but we continue to believe there is opportunity at the top end of the range to consider selling, whether that be reducing long exposure or legging in on shorts. If the market fails to break out above resistance in the coming sessions, it is likely that we see long liquidation take prices back towards first support which comes in from 122.475-122.75. If the bulls do achieve a breakout, the next resistance pocket comes in from 127.20-127.35.

Resistance: 125.20-125.35***, 127.20-127.35***, 130.10****

Support:122.475-122.75***, 120.20-120.625****, 117.90-118.70****

 

Feeder Cattle (March)

March feeder cattle saw some volatility on the open, as we saw a “surprise” gap higher with prices testing our “last line of defense” from 149.40-150.00. The market was not able to hold water at those levels and that led to some pressure for the remainder of the day. If that market fails to gain traction here in the first half of the week, we could see selling pressure come back into the market and press us towards first significant support which we have marked as 143.25-143.50. As with the fat cattle, we continue to feel that this is an opportunity to consider the sell side regardless if you are bullish or bearish (reduce longs/initiate shorts).

Resistance: 147.75-148.00***, 149.40-150.00***, 153.95*****

Support:145.80-146.45***, 143.25-143.50****, 142.10-142.60**, 139.85-140.125***

 

Lean Hog Commentary & Technicals (April)

April lean hogs finished today’s session down .50 at 73.30, trading in a range of .90. Supply side fundamentals continue to lend hand to keeping a lid on a significant rally. Technical resistance from 76.225-76.40 held last week and will continue to be the significant pocket to keep an eye on. On the support side, the market is making a run towards the 100-day moving average which comes in at 72.80. A break and conviction close below opens the door to accelerated selling pressure which could press prices towards the bottom end of the range which we see coming in from 70.625-71.15. This pocket represents The November lows and the 200-day moving average.

Resistance: 74.00-74.375**, 76.225-76.40**, 77.25****

Support: 72.80**, 70.625-71.15***, 67.75-68.00****

 

Euro (March)

Session close: Settled at 1.24265, down 33.5 ticks

Fundamentals: The Euro began working lower late Friday afternoon and continued on that path through today’s session. This slow and steady drip eludes to traders taking positions off the table at the beginning of a pivotal week that has the State of the Union Tuesday night, Fed decision Wednesday and Nonfarm Payroll Friday. U.S PCE Index data was in line with expectations today. Tomorrow morning brings Eurozone GDP at 4:00 am CT along German CPI. U.S Case Shiller is due at 8:00 am CT and Consumer Confidence at 9:00. Both fundamentally and technically, the Euro has more upside in the long-term.; we believe pullbacks are buying opportunities However, traders do want to manage risk properly through what is expected to be a volatile week. Do not forget to read out Tradable Events this Week.

Technicals: Price action is attempting to relieve itself from overbought conditions. The 14-day RSI reached 75 last week. The CoT showed traders expanded the already record long position in the Euro by 25% in the week ending January 23rd. The Dollar Index is bouncing from the most oversold on the weekly since November 2007. To the downside we have first key support at 1.2349-1.23685 and today’s session low of 1.2374 was kept in check by this level. Though we remain long-term bullish, we would rather be buyers closer to major three-star support at 1.2209-1.22135.

Bias: Neutral/Bullish

Resistance – 1.2514**, 1.2608***

Pivot – 1.2434-1.2436***

Support – 1.2349-1.23685**, 1.2307*, .2209-1.22135***

 

Yen (March)

Session close: Settled at .92035, down 23 ticks

Fundamentals: The Yen retreated slightly today, but given recent volatility and today’s Dollar strength, this was a solid session for the currency. Still, we are concerned that Wednesday’s Fed meeting can bring a hawkish surprise and near-term pressure for the Yen. Furthermore, the Yen is attempting diverge from falling Treasury prices but if the Treasuries are lower because of the Fed, the Yen is likely to take similar heat. In a week that will center around U.S political and monetary policy, there are some key data points out of Japan to watch. Household Income and jobs data is due tonight at 5:30 pm CT. BoJ Core CPI is due out at 11:00 pm CT. Tomorrow night is going to be a volatile one for reasons more than just the State of the Union with Japanese Industrial Production data along with Chinese Manufacturing.

Technicals: The Yen has finally picked itself up out of the gutter but faces a tremendous hurdle this week in maintaining its recent gains. Price action is showing signs of fatigue just below major three-star resistance. This level will be extremely critical and a close out above here on the week should spark the next bull leg higher. While we see first key support at .9164, we would rather be buyers against major three-star at .9089-.91035.

Bias: Neutral/Bullish

Resistance – .9237-.9255***, .93215**, .9480***

Support – .9164**, .9089-.91035***, .9043*, .8998-.9006**, .8946-.8957**

 

Aussie (March)

Session close: Settled at .8101, down 18 ticks

Fundamentals: The Aussie has gained more than 8% since its December bottom and as the year unfolds there is room for further gains. For now, we believe it should be most vulnerable to a strengthening Dollar and domestic data this week. First, last week’s CPI read out of its neighboring New Zealand missed widely and we will be watching tomorrow nights Aussie CPI read that will be accompanied by Chinese Manufacturing data (China is Australia’s top trade partner). Tonight, there is Business Confidence data at 6:30 pm CT.

Technicals: Price action traded to a high of .8135 on Friday, the highest level since May 2015 before paring gains. Pullbacks in the Aussie over the last two months of been extremely shallow and the trade is overdue for a sharp move. The weekly RSI is testing the level in which it hit last September, when it traded at this price, this is the highest since 2011. We believe that if the Aussie can chew through major three-star support at the .8033-.8037, the door will open for it to trade down to .7874-.7881.

Bias: Bearish/Neutral

Resistance – .8100-.8125***, .8151*

Support – .8033-.8037***, .7998**, .7962**, .7874-7881***

 

Canadian (March)

Session close: Settled at .81195, down 2 ticks.

Fundamentals: The Canadian stayed in a very tight range through the session as NAFTA talks wrapped up with a positive vibe. We look to a busy week of U.S political and monetary policy to be the key catalyst in price action but at the same time traders need to keep an eye on Chinese Manufacturing tomorrow night and major Canadian data points Wednesday; monthly GDP data and Raw Materials Price Index. We are very bullish the Canadian in the long-term and hope to see it about 1% lower this week on the U.S Dollar consolidating higher from oversold territory to present a strong buy opportunity, rather than down on negative news out of Canada.

Technicals: Price action is holding strong against major three-star resistance at .81005-.81195. One concern technically, is trend line resistance from July 2014. However, like the Aussie did against a similar trend line, we believe the Canadian can get out above here in due time and this can ultimately spark a move to .8524. We would like to see price action dip to .7931-.7949 in order to present the aforementioned buying opportunity.

Bias: Neutral

Resistance – .81005-.81195***, .8163**, .8290***, .8524****

Support – .80505-.8057**, .7996**, .7931-.7949***, .7903**, .7752-.7787***

 

 

For more information please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

CORN (March)

Yesterdays Close: March corn futures finished yesterday’s session down ½ of a cent, trading in a range of 2 ½ cents. Funds were estimated sellers of 6,000 contracts for the day.

Fundamentals: Informa Economics released their updated estimates for 2018 US plantings, they have it pegged at 89.187 million acres, this is down from their previous estimate of 89.675 million acres. Weather in South America continues to be important as it could have implications on near to intermediate term price action. Hot and try weather has been becoming more of a concern in Argentina with the possibility of yield loss. The market doesn’t seem to be putting any premium into the market, but Fridays February option expiration could be the catalyst keeping the market in check. Looking at open interest, 350 looks to be the magnet as of right now. There are about 60,000 total open calls and open puts at 350 and a nickel on each side. The weaker US Dollar is certainly supportive in the overnight and early morning session on the back of comments from Treasury Secretary Steve Mnuchin at the World Economic Forum in Davos.

Technicals: The overnight and early morning price action is encouraging, but expectations should once again be tempered as we approach the top end of the trading range from 354-355, above that there is additional resistance from 358 360 ½. If the bulls can achieve a conviction close above these levels, then the funds have a green light to cover some of their big short position; until then the bears remain in control. If the bears can defend technical resistance, we expect to see the market retreat and slide towards the bottom end of the range which we have defined as 345-346 ½.

Bias: Bearish

Resistance: 354-355**, 358-360 ½****, 366 ½-369 ¼****

Support: 345-346 ½**, 334-335 ¼***, 323-325 ¼**

 

SOYBEANS (March)

Yesterdays Close: March soybean futures finished yesterday’s session up 2 ½ cents, trading in a range of 9 ¼ cents. Funds were estimated buyers of 3,000 contracts.

Fundamentals: Informa Economics released their updated estimates for US plantings in 2018, they have lowered plantings from 91.367 million acres to 91.197 million acres. Weather developments in South America continue to be the headline driver in the market. Hot and dry weather in Argentina is the primary focus as there could be the potential for yield loss. Weather in Brazil seems to be more favorable at this point in time. Soybean Meal has also been providing some support to the market, if we see a correction in the market, that could put pressure on beans.

Technicals: Soybean futures looked like they were going to roll over yesterday afternoon but managed to find support at the 200-day moving average. The inability to breakdown led to additional short covering from the funds. The overnight session has yielded similar results with the market trading lower but finding support at the same spot. The market is now near unchanged as we await the floor open for more volume to give us more direction. Key technical resistance remains at 986 ½- 989. This pocket represents the 100-day moving average along with the recent highs and the 50% retracement from the June lows to July highs. The fact that the market is knocking at the door for the last three sessions lends hands to another leg higher on a close above resistance. The next significant resistance doesn’t come in until 999-1004.

Bias: Neutral/Bullish

Resistance: 986 ½-989***, 999-1004**, 1020 ¼-1027****

Support: 979 ¼**, 971 ¾ ***, 961 ¼-963 ¼**, 950-952 ¼***

 

WHEAT (March)

Yesterdays Close: Wheat futures finished yesterday’s session down 3 ¾ cents, trading in a range of 5 ¼ on the day. Funds were estimated sellers of 3,500 contracts.

Fundamentals: Wheat futures are finding support this morning on the back of a weaker US Dollar. If the USD continues to fall, this could help the prospects of better exports. Exports have been a lagging catalyst which has kept a lid on the market. If we start to see a trend of better than expected exports, you can imagine that funds would start to cover some of their large short position. Export sales will be released on Friday due to the government shut down to start the week.

Technicals: March wheat futures are finding strength this morning thanks in large part to the dollar getting taken to the wood shed after comments from Treasury Secretary Steve Mnuchin. Though this may have temporarily stopped the bleeding, the bears remain in control. First technical resistance comes in from 428 ¾-430. If the bulls cannot chew through and close above technical resistance with conviction, we expect to see the market work towards the bottom end of the recent range which comes in from 410 ½-413 ¼.

Bias: Bearish

Resistance: 428 ¾-430**, 437**, 443-448 ¼ ****

Support: 410 ½-413 ¼***, 399-402 ¾****

 

For more information please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

The Evolving Economics of Bitcoin, Gold and Fiat Currencies

  • By CME Group

An inherent tension exists between the two major purposes of money.  Currencies that are perceived as great stores of value, such as gold and bitcoin, make for poor mediums of exchange.  By contrast, currencies that are effective mediums of exchange, such as fiat currencies used the world over, can make for dubious stores of value. Where a currency falls on the store of value versus medium of exchange spectrum influences its usefulness as a unit of account and a standard of deferred payment.

Supply Scarcity and Stores of Value

As stores of value, many investors perceive gold and, more recently, bitcoin as second to none.  Since 1971, gold has appreciated from $35 per ounce to around $1,300 at the time of this writing, a gain of over 3,500%.  Bitcoins have done even better.  On July 19, 2010, a bitcoin was worth $0.08.  At the time of this writing, it’s priced close to $5,300 per bitcoin, a gain of over 6,000,000% in seven years.  Not bad!

Figure 1: Gold and Bitcoin Have Been Great Stores of Value.

Figure 1: Gold and Bitcoin Have Been Great Stores of Value.

Whether gold and bitcoin really are stores of value is not universally accepted. Viewed from a fiat currency perspective, such as that of the U.S. dollar, bitcoin and gold are, to say the least, not without risk.  Over the past 12 months, the annualized standard deviation of gold has been 12%. Gold had a 70% drawdown between 1980 and 1998. Compared to bitcoin, the gold market looks sleepy.  Bitcoin owners experienced a 60% annualized standard deviation over the past 12 months and in the past, it has achieved a mind boggling 175% annualized risk (Figure 2).  Moreover, in its short life, it has already had drawdowns of 93% and 84% (Figure 3).

Drawdowns of such magnitude do sound crazy yet investors still allocate funds to other markets which have experienced large drawdowns. The U.S. equity market, which experienced an 89% drawdown between 1929 and 1933, from which it took until 1954 to recover. Since then, it has experienced a 47% drawdown in 1973-74, a 50% drawdown in 2000-2002 and a 60% drawdown from October 2007 to March 2009.  Crude oil prices are currently 67% off their 2008 highs.  The difference being, of course, that few investors would argue that stocks and crude oil are stores of value.  Rather, investors perceive them as being risky investments.

Figure 2: Stores of Value are Not Without Risk When Viewed from a USD Perspective.

Figure 2: Stores of Value are Not Without Risk When Viewed from a USD Perspective.

Figure 3: What’s a 93% Drawdown Among Friends?

Figure 3: What’s a 93% Drawdown Among Friends?

However volatile they may be, the reason why gold and bitcoin are perceived as stores of value is simple: their money supply doesn’t grow quickly and, in the case of bitcoin not at all, some day.  Both gold and bitcoin money supply growth is determined by mining output. Over the past half century, new gold mining supply has added anywhere from 1.1% to 2.4% to the existing stock of previously mined gold (Figure 4) and gold prices tend to vary inversely with the degree of mining supply coming on line.  This is much slower growth than the money supply of the U.S. dollar and credit. Even during the 14 years prior to the 2008 financial crisis, the Federal Reserve’s balance sheet, one of many proxies for the amount of money in the system, grew by 5.6% per annum.  Since the fall of 2008, it has expanded by nearly 20% per year.

Cryptocurrencies such as bitcoin have very specific processes for expanding their money supply – mining by technology with strict limits.  For bitcoin, most of the “mining” activity happens in China.  The strict money supply rules mean that if demand grows, as it has, the price can soar, which it has.  Some observers, such as economist and Nobel laureate Robert Shiller, have suggested that the rapid rise in bitcoin prices resembled a financial bubble.  Nevertheless, Shiller also notes that from his perspective, gold has been in 5,000-year bubble.

Bitcoin’s mining supply grew at an infinite pace in 2009 when the currency burst into existence.  This year it will likely slow to around 4.2% and then drop to below 2% per year after 2020.  Sometime around 2140, the last new bitcoin ever will be mined, bringing the total to 21 million (Figure 5). The bitcoin market anticipates this, hence the extraordinary bull market in the digital currency. This contrasts with gold, whose price has been depressed by 94 million new ounces coming onto the market each year.

Figure 4: Gold Prices Vary Inversely with Mining Supply.

Figure 4: Gold Prices Vary Inversely with Mining Supply.

Figure 5: The Bitcoin Algorithm Reaches a Theoretical Limit of 21 Million.

Figure 5: The Bitcoin Algorithm Reaches a Theoretical Limit of 21 Million.

While bitcoin has delivered its holders spectacular, if highly volatile returns, what’s most amazing is how little it’s worth, even at $5,800 per coin.  If one assumes that there will be 21 million coins in existence by 2140, that means that their aggregate present value comes to $120 billion.  While it is nothing to sneeze at, it pales in comparison to the outstanding value of the nearly 5 billion ounces of previously mined gold whose total worth is over $6 trillion at current prices.  Moreover, the 94 million ounces that will come out of the world’s mines in 2017 have a value of nearly $120 billion at current market prices, about the same theoretical value of all the bitcoins that will ever come into existence.  While there is no logical reason to suppose that bitcoin should have the same value as gold, if it did, each bitcoin should be worth approximately $285,000, 45 times the current market price.  As such, one might wonder: is bitcoin still vastly undervalued even after a 6,000,000% rally?

Bitcoin, Gold and Fiat Currencies Demand and Regulation

While gold and bitcoin supply comes from miners, what drives demand is another story.  Gold’s demand side is mainly as jewelry and as an alternative currency that get stored in vaults, albeit one that pays no interest. As such, when interest rate expectations increase, gold prices tend to fall and vice versa.

By contrast, demand for bitcoin has a reputation of being used for money laundering, tax evasion and avoidance of regulated cross-border money flows.  The motivation is that the transactions are extremely hard to trace, yet they offer considerable security. Proponents of bitcoin and cryptocurrencies would argue that the reputation of cryptocurrencies being used for criminal purposes may not be entirely fair.  After all, fiat currency cash is used by criminal organizations and tax evaders the world over.

A little historical background may be informative.  When the euro was introduced at the end of the 1990s, illegal drug and money laundering transactions in Europe, including Eastern Europe, were often conducted in large denomination Deutsche Mark (DM) paper currency.  The advent of the euro meant that the DM cash notes had to be turned in and exchanged for euros, and the unintended consequence was that large denomination U.S. dollar paper currency filled the void left by the DM.  This switch from DM to U.S. dollars actually helped push the euro lower against the U.S. dollar around the time of the transition.

It is also worth noting that of the $1 trillion or so of U.S. paper currency outstanding, about 50% resides outside the United States.  Unfortunately for drug dealers and money launderers, the digital revolution is rapidly eliminating the need for paper currency and even the ability to use it secretly and discreetly.  Bars, restaurants, and dry cleaners are no long bastions of cash transactions.  This has created a market opportunity, so to speak, for cryptocurrencies that can facilitate secure, yet difficult to trace transactions.

Regulators, tax collectors, central banks, etc., around the world can be expected to act aggressively to combat illegal uses of digital currencies, especially as they gain traction in the global economy.  U.S. regulators are beginning to act.  The Securities and Exchange Commission (SEC) has launched fraud cases.  China has started to rein in the use of cryptocurrencies for moving money out of the country.

Regulators are also moving to bring cryptocurrency platforms into the mainstream.  For example, in July 2017, the Commodities Futures Trading Commission (CFTC) approved a new Derivatives Clearing Organization (DCO) which was also granted an order of registration as a Swap Execution Facility (SEF).  Under the order, the new DCO will be authorized to provide clearing services for fully-collateralized digital currency swaps (i.e., Bitcoins, etc.).    Several other countries are also onboard with encouraging cryptocurrencies for legal commerce, including Japan and South Korea.

Some of the cryptocurrency platforms are starting to perform active user due diligence in terms of Know Your Client (KYC) and Anti-Money Laundering (AML), putting them in a position to successfully meet a variety of regulatory tests and become more mainstream with their business models.

And, one should recognize that regulation does not mean the demise of cryptocurrencies – only that the motivating uses will eventually have to be dominated by legal activities. For now, the regulatory landscape for cryptocurrencies is very much a moving target around the world.

Medium of Exchange and the Benefits of Inflation

While gold has proven to be a great, if volatile, store of value, essentially nobody still uses gold as a medium of exchange. When was the last time that you heard of somebody buying groceries, clothing, a new house or a new car with gold coins?  The problem for gold as a medium of exchange is simple: why would you part company with it now if you think that it might be worth more in the future? This problem applied doubly (or exponentially) for bitcoin and other cryptocurrencies. Wouldn’t you have regretted paying 20 bitcoins for a $40,000 car in June 2017 only to see the same 20 bitcoins valued at nearly $100,000 by October of the same year?

Basically, the overwhelming majority of transactions are in fiat currencies created by central banks.  These currencies tend to lose their value over time, not just against gold and bitcoin as we have seen, but also against the baskets of goods included in consumer price indices.  Some fiat currencies lose their value slowly, others do so quickly. That loss of value is precisely what makes them useful.  Without the fear of inflation, holders of currency tend to hoard rather than spend it.  Hoarding currency depresses economic growth and creates financial instability.  The Japanese yen, the one fiat currency that has experienced deflation over the past few decades, is a case in point.  Far from being a virtuous store of value, the Japanese deflation produced a depressed, underperforming economy.

Likewise, both gold and silver were extensively used as currencies in the past and both produced less than desirable economic outcomes.  Despite the rosy history of the gold standard written by gold bugs, economic reality under the gold standard was harsh.  While laboring under the gold standard, the United States experienced high economic volatility (Figure 6) and repeated economic depressions: 1873-79, 1884, 1893-98, 1907, 1920 and the Great Depression of the 1930s. Between 1877 and 1933, when then President Franklin Roosevelt confiscated the nation’s gold and devalued the U.S. dollar to $35 per ounce from $21, per capita GDP rose by just 1% per annum despite tremendous technological progress.

The New Deal was a success. Between 1933 and 1939, real per capita GDP grew by 6.8% per year and that growth accelerated to over 10% per year during the massive, fiat-currency financed, government spending program known as World War Two, which was basically the New Deal on steroids.  Post-war, under the Bretton Woods system of fixed exchange rates tied to gold, real per capita GDP expanded by 1.3% between 1945 and 1971 when President Nixon abandoned gold entirely and floated the U.S. dollar.  Floating currencies proved a difficult adjustment but despite the volatility of the 1970s and the Great Recession in 2008, U.S. real per capita GDP expanded by 1.7% per year, on average, since Nixon dropped gold and floated the dollar (Figure 7).

Figure 6: The Gold Standard Produced Massive Economic Volatility.

Figure 6: The Gold Standard Produced Massive Economic Volatility.

Figure 7: The Gold Standard Also Coincided with Sub-Par Progress in Real Per Capita Income.

Figure 7: The Gold Standard Also Coincided with Sub-Par Progress in Real Per Capita Income.

Unit of Account and Method of Deferred Payment

It’s difficult to use money as a unit of account if it is excessively volatile. While the U.S. dollar loses value versus consumer goods and services over time, it has the virtue of losing that value at a steady rate.  By contrast, consumer prices viewed from a gold or bitcoin perspective are excessively volatile making using either currency as a unit of account difficult (Figure 8).  Moreover, using either currency as a method of deferred payment would be extremely risky.

Figure 8: Consumer Prices from a USD, Gold and Bitcoin Perspective.

Figure 8: Consumer Prices from a USD, Gold and Bitcoin Perspective.

In addition to being volatile, consumer prices tend to be in a strong deflation from both a gold and bitcoin perspective.  Since December 1999, consumer prices have risen by 44% in U.S. dollar terms but have fallen 64% in gold terms.  From a bitcoin perspective, prices have fallen by 99.98% since the end of 2010.  Imagine the economic disaster that would have resulted had people borrowed money in gold or in bitcoins.  Paying back loans would be a near impossibility.  As such, given the inadequate growth in money supply, and the persistence of long-term deflation, there is little possibility that either bitcoin or gold could be used for deferred payments.

This is the beauty of fiat currencies.  Central banks can create as much money as they deem necessary.  Moreover, fiat currencies pay interest, and long-term interest rates allow investors to discount future cash flows into the present, creating liquidity, facilitating trade and greasing the wheels of commerce. Essentially, fiat money inflation is the lubricant of the economic engine. This isn’t to suggest that either fiat currencies or the central banks that create them are above reproach.  They can create too little credit growth (the U.S. during the early 1930s or Japan during the 1990s), too much inflation (the U.S. and Europe during the 1970s), or hyperinflation (Germany in 1923 or in Venezuela or Zimbabwe today).  Unlike the gold standard and bitcoin, which depend upon mining supply, central banks can at least attempt to create the right amount of money to keep the economy growing.

Moreover, holders of fiat currency don’t necessarily lose their value if they put their currency to work in the banking system and bond markets, which pay interest, or the in the equity market, which tends to increase over time. Although interest rates can be below the rate of inflation, as they were frequently during the 1970s and have been since 2008, for the most part, depositors hold their own against inflation. Over the long term, fiat currencies only lose value if they are kept under the mattress, in cash, in checking or in other non-interest-bearing accounts.

The ability to use a currency as a method deferred payment explains why even under precious metals standards there tends to be so much inflation. Yes, you read that correctly, inflation.  Far from preventing inflation, gold and silver standards require currency debasement in order for the economic system to function.  For example, under Julius and Augustus Caesar, the Roman denarius contained four ounces of silver.  250 years later, by the late third century, that same coin contained only 2% as much silver as before, implying that it was worth about 1/50th as much.  That sounds like a dramatic depreciation but it amounts to an average annual inflation rate of about 1.6%, not far from what central banks target today. Rome’s metal-based monetary system functioned only with debasement.

The Roman experience of precious metal currency debasement was just a precursor to future European currency debasement.  Essentially every single country in Europe did exactly what Franklin Roosevelt would do in 1933: they resolved financial crises by debasing their currencies (Figure 9).  Sometimes the only way to pay off debts, public or private, is to do so with money that is worth less than what it was worth at the time the loans were secured.  This is the Achilles heel of gold and bitcoins as currencies.  They are stores of value. Stores of value are deflationary and deflation is destabilizing.

Figure 9: Past as Prologue, a Brief History of Currency Debasement.

Figure 9: Past as Prologue, a Brief History of Currency Debasement.

The Future of Bitcoin

So, will bitcoin rally another 5,000% or more until the outstanding value of the digital currency equals the outstanding value of the world’s gold?  The short answer is that we don’t know.  Something is worth what somebody else is willing to pay for it, and how much people in the future will be willing to pay to hold bitcoins is difficult to know. That said, precious metals do hold a potential insight into one factor that might limit bitcoin’s future upside.

Just as gold isn’t the only precious metal, bitcoin isn’t the only digital currency.  As we discussed earlier, gold responds negatively to increases in gold mining production.  It also responds negatively to increases in silver mining production. Thus, a boom in silver production can contain price rises in gold and vice versa (Figure 10).

Figure 10: Gold and Silver Respond Negatively to Rises in Each Other’s Mining Supply.

Figure 10: Gold and Silver Respond Negatively to Rises in Each Other’s Mining Supply.

Likewise, the existence of other digital currencies could limit price upside for bitcoin.  Ethereum, Zcash, dash, ripple, monero etc. compete with bitcoin just as silver, and to a lesser extent platinum and palladium, compete with gold. This might keep bitcoin’s value in check before it rises another 10 or 100-fold in value.

Indeed, just in the past two years, over 1,000 additional digital currencies have been launched.  One could argue that they actually are limiting the rise in bitcoin, whose price appreciation actually has slowed, at least in percentage terms. Even bitcoin itself has split (“forked”) into bitcoin, bitcoin cash and bitcoin gold as disagreements within the user community create new iterations of the original currency.

That said, two things argue in favor of bitcoin’s continued success: network effects and government regulation. Just as Facebook, LinkedIn and a handful of other websites or apps dominate social networking, it is possible that the incumbent currencies like bitcoin and ethereum could continue to dominate cryptocurrencies as well for the simple reason that they have large networks of users who accept them.  Google’s attempt to invade the social networking space with its Facebook equivalent, Google+, didn’t turn out so well because the user community was already on Facebook’s platform (although Google, by all appearances continues to prosper in other domains). Analogous network effects could work to bitcoin’s advantage.  If a large community of users accept it, they will be loath to move elsewhere unless a new alternative is truly completing and not a mere copycat.

Isn’t the U.S. dollar a bit the same?  What makes USD the world’s reserve currency isn’t just the size of the United States (4% of the world’s population and about one fifth of the world economy) and its military might, it’s also a network effect: people the world over denominate their foreign transactions in USD. Once enough people agreed to use USD, it began to dominate the world’s liquidity and became the primary global reserve currency.

Recently, governments have begun to crackdown on digital currency exchanges in the case of China or at least regulate initial currency offerings (ICOs) in a manner similar to their regulation of initial public offerings (IPOs) of equities.  To the extent that ICO regulation limits the creation of new currencies, one unintended by-product could be to restrict competition and to enhance the market position of incumbent currencies like bitcoin and ethereum. Libertarians often rightly accuse government regulation of protecting incumbents by raising barriers to entry.  There is no reason to think that cryptocurrencies will be an exception to this rule.

On the other hand, regulation could also give rise to, and bestow legitimacy upon, new cryptocurrencies that lack bitcoin’s main attribute and flaw: an asymptotically fixed money supply. A digital currency that replaces fiat currencies as a medium exchange cannot have a fixed supply.  In fact, central banks, like the Federal Reserve, might even create their own cryptocurrencies but ones that are designed to optimize economic growth. It will probably need to have constant money supply growth and preferably money supply growth that matches economic needs and not some algorithm’s hard, mathematical constraint. In the meantime, bitcoin could continue its role as a sort of purely electronic crypto-gold: a perceived store of value given to great but, perhaps, slowly decreasing volatility.

Bottom Line:

  • A natural tension exists between stores of value and mediums of exchange.
  • Gold and bitcoin have been great, if erratic, stores of value.
  • Gold and bitcoin appreciate because of the slow growth of mining supply.
  • Fiat currencies are more practical as mediums of exchange because they lose value which encourages holders to exchange them for goods and services.
  • Strong stores of value encourage hoarding, deflation and financial instability.
  • They also make for poor units of account and methods of deferred payment.

 

For more information and to open your trading account please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

NYSE FANG+ Index

From theice.com

The NYSE FANG+ Index

 

INDEX COMPOSITION: BENCHMARKING TODAY’S TECH GIANTS

The NYSE FANG+ index includes 10 highly liquid stocks that represent the top innovators across today’s tech and internet/media companies. The index’s underlying composition is equally weighted across all stocks, providing a unique performance benchmark that allows for a more value-driven approach to investing. While the performance of indices weighted by market capitalization can be dominated by a few of the largest stocks, an equal-weighting allows for a more diversified and represented portfolio. NYSE FANG+ is one of the most highly correlated indices to technology and related stocks.

UNDERLYING STOCKS IN NYSE FANG+*

Facebook
(FB)

Apple
(AAPL)

Amazon
(AMZN)

Netflix
(NFLX)

Google
(GOOGL)

Alibaba
(BABA)

Baidu
(BIDU)

NVIDIA
(NVDA)

Tesla
(TSLA)

Twitter
(TWTR)

Real-time index calculations are available to help you benchmark the core group of stocks included in the index, and official open and close prices are published daily on the NYSE Global Index Feed.

REVIEW THE FULL INDEX METHODOLOGY HERE

TRADING NYSE FANG+ INDEX FUTURES ON ICE: THE BENEFITS

NYSE FANG+ futures, which will begin trading on ICE Futures U.S. on November 8, 2017, subject to regulatory review, provide a concentrated hedging mechanism for asset managers, proprietary trading firms, institutional traders and retail investors with technology exposure. The contract features:

Low-cost exposure to tech sector

One of the most highly correlated indices to tech and related stocks

Hedging mechanism to quickly increase or decrease tech exposure in equities portfolios

A disciplined methodology that will dictate the evolution of underlying securities

NYSE FANG+ INDEX PERFORMANCE COMPARISON 
(Hypothetical performance using backtested data)

Based on back-tested performance data, the combination of stocks in the NYSE FANG+ Index have returned a 28.44% annualized total return from September 19, 2014 to September 15, 2017, as compared to 14.89% for the NASDAQ 100®, 9.86% for the S&P 500® and 16.80% for the S&P 500® Information Technology Index.

Calculations are based on the price return of each index. NYSE FANG+ is an equal-weighted index, whereas the other indices represented in the chart above are weighted by market capitalization.

Description

NYSE FANG+™ is a new index providing exposure to a select group of highly-traded growth stocks of next generation technology and tech-enabled companies. The futures contract on the index is designed to offer the ability to gain or reduce exposure to this key group of growth stocks in a capital efficient manner.

Market Specifications

TRADING SCREEN PRODUCT NAME

FANG+ Index Futures

TRADING SCREEN HUB NAME

ICUS

SYMBOL

FNG

CONTRACT SIZE

$50 times the NYSE FANG+ Index

CONTRACT MONTHS

4 contracts in the March, June, September and December cycle

PRICE QUOTATION

Index points, to two decimal places

TICK SIZE

.10 Index points, equal to $5.00 per contract; calendar spread trades may be executed at .05 index point increments.
(Block Trades can be done at .01 Index points)

LAST TRADING DAY

Third Friday of the expiration month. Trading in the expiring contract ceases at 9:30 am NY time on Last Trading Day.

DAILY SETTLEMENT

16:14 to 16:15 NY time

FINAL SETTLEMENT

Cash settlement to a special calculation of the NYSE FANG+ Index (Price Return version) based on the opening prices of the component stocks on the Last Trading Day for the contract.

POSITION ACCOUNTABILITY

Position Accountability Level – 20,000 lots in any month.

POSITION LIMIT

Position Limit – 100,000 lots in all months combined.

DAILY PRICE LIMIT

None.

BLOCK TRADES

Yes, 20 lot Block Minimum Quantity

EFPS AND EFSS

Yes.

IPL LEVELS

IPL Amount: 2000 Index Points
Recalc Time and Hold Period: 5 seconds

NCR AND RL

NCR 3.00; RL 7.50; CSLOR 2.00 Index Points

EXCHANGE FEES

Screen Trades: $1.00 per side
Block and EFRP Trades: $1.50 per side

MIC CODE

IFUS

CLEARING VENUES

ICUS

For more information please contact DAW Trading at info@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

 Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.