Rising Treasury yields pose risk for those over-weighted in stocks

Wall Street on Parade/Pam Martens and Russ Martens/1-22-2018

“President Donald Trump’s persistence on his Twitter page in touting how well the stock market is doing is distracting investors from a scary, negative indicator for stocks – rising yields on U.S. Treasury securities. Since September of last year, yields have been on a steady and sharp upward trajectory, reminiscent of standing at the base of a mogul run in Colorado and craning one’s neck toward the summit. The complacency the stock market is showing toward the fierce rise in yields may also turn out to be a dangerous, slippery slope for those heavily weighted in stocks.”

MK note:  Complacency has become an important word in the financial lexicon these days, and complacency, the market philosopher tells us, is the mother of panic.

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Gold most important intermediate term test

Seeking Alpha/Cliff Droke/1-21-2018

“If, however, the gold price continues higher beyond the September high at the $1,355 level, the odds will favor the intermediate-term bull market continuing with significantly higher prices to follow. Based on the established internal momentum underlying the precious metals market, the odds favor the test of the September 2017 high being a successful one for the bulls.”

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Gold sideways, markets looking for direction

EARLY REPORT

Gold is sideways in afternoon New York trading at $1333. Silver is also running sideways at $17.01. With the latest federal government shutdown non-event now behind us – the nineteenth scare since the mid 1970s and counting – the markets seem to be looking for direction. The dollar is a mixed bag trading down against European currencies and up against their Asian counterparts.

Chart of the Day

Chart notes: On April 9th, 2011, Congress averted a shutdown with a patchwork deal very much like the one engineered last night and announced this morning. On that day gold, as shown on the chart, was trading at $1462.  Though disaster appeared to have been put on hold, gold investors were not convinced. The price in the ensuing months continued to track higher registering one all-time after another. That August, with gold trading at $1721, Standard & Poor’s dropped the hammer on the U.S. government’s credit rating saying that “the effectiveness, stability, and predictability of American policy-making and political institutions have weakened at a time of ongoing fiscal and economic challenges. . .”
By September it reached its all-time high near $1900 per ounce – 30% higher than April’s pricing. Though the financial markets were in a very fragile state in 2011, American political institutions today are no more effective, stable and predictable than they were then. One wonders, with that in mind, how S&P might view this latest go-around. By the way, if gold were to replicate its April to September 2011 performance, it would end up trading in the vicinity of $1730 per ounce.

 

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Does it matter if the U.S. government shuts down?

MoneyWeek/John Stepek/1-19-2018

“Meanwhile, bond yields are already ticking higher. In fact, the yield on US ten-year Treasury bonds has nudged above 2.63% today. That number is significant because until now, it represented the 2017 high. It’s also the figure that the “other” bond king – Jeff Gundlach – suggested represented the point at which we could start believing that the bond bull market is truly over (the original bond king, Bill Gross, already said that it’s done and dusted). For now, markets are relaxed. But this is one to keep an eye on.”

MK note:  What makes it different this time are the circumstances under which the shutdown is occurring, i.e., rising rates (falling bond values), China’s downgrade of U.S. debt along with contentious trade negotiations, a declining dollar, and so on – a volatile financial backdrop to the political drama in Washington. I am reminded of Standard & Poor’s statement when it downgraded U.S. sovereign debt after the 2011 near-shutdown episode:

• “[T]he downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

• “Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.”

Food for thought. . . . .

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The blatant dishonesty of the boom

SITUATION UPDATE – Crowd mania

Alhambra Investments/Jeffrey Snider/1-20-2018

“What I do mean is much simpler. ‘They’ keep calling this a boom, and it is often characterized in the mainstream as a big one – the biggest, some people are saying, since 2007 (which isn’t really a sufficient standard to begin with, but that’s for another day). Economists are constantly characterizing the economy as great, therefore the norm has become the economy is great, leaving our brains to believe it has to be because that’s what everyone else thinks. And I keep asking where?”

MK note:   Jeffrey Snider throws another log on the disinflation fire by asking that very fundamental question. . . .Where? This piece is also a thoughtful update on crowd mania, a subject we have highlighted here on several occasions over the past several weeks.  We are reminded of Bernard Baruch’s comment on midges (see link below).

Related:
• 2018’s unbridled stock surge may signal the ‘overshoot’ phase of this bull market is underway/CNBC/Michael Santoli
Market Anecdote on Bernard Baruch (Scroll until you see it)
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Bond market bear creating gold bull

Ahead of the Herd/Rick Mills/1-19-2018

“According to a 2017 report from Bank of America Merrill Lynch, when gold prices and bond yields rise in tandem, the stock market tends to move the other way. The report notes both the stock market crashes of 1973 and Black Monday in 1987 were preceded by three quarters of rising bond yields and rising gold. That’s because when both investment vehicles rise, it signals higher inflation, and that leads to rises in interest rates, which are generally bad for stock markets. When stock markets fail, investors turn to more concrete safe havens Ie. gold.”

Related: Look out: Gold and bonds are sending a signal reminiscent of 1987 and 1973 market crashes/CNBC/Ungarino/2-16-2017
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Macro changes for gold in 2018 and beyond

Empire Club/Address by Nich Barisheff/1-11-2018

“As a result, the only adjusting factor for increased demand is an adjustment in price. With the global financial system experiencing a condition not seen since 1929 of a simultaneous triple bubble in stocks, bonds and real estate sitting on a historically unprecedented pile of $270 trillion of unpayable government debt, subprime auto debt, student loan debt, margin debt and consumer debt, in addition to a very dangerous mountain of over $600 trillion of derivatives, conditions are set for a major market correction. This will result in a massive increase in the price of gold as investors flee to the safety of gold.”

MK note: Barisheff covers all the bases in that short quote.  Though I do not agree with every position he takes in this lengthy presentation (nor most likely will you), he does provide readers with a wealth of information and opinion upon which they can come to their own conclusions. I do agree wholeheartedly, however, with this basic piece of advice:

“When this shift becomes obvious, it will be too late to purchase the insurance that gold has offered for over 3,000 years; you can’t buy insurance during a hurricane. When buying gold for insurance purposes, it is important to buy physical bullion, and to store it on an allocated, insured basis. Don’t buy paper proxies or derivatives such as ETFs, futures contracts or certificates. These proxies can defeat the purpose of holding gold, as there is a high risk that these instruments will fail exactly when you need your gold the most.”

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Catch up on the Asian gold market – Chinese New Year and India’s wedding season

As we  move into Asian trading hours. . . . .

Gold Eagle+ Mining.com/1-21-2018

“Reports from Chinese jewellers suggest demand leading into this year’s Lunar New Year is strong,” ANZ analysts said in a note. . . .Jewellers were not making purchases because they expect a duty cut of at least 2 percent in the budget on Feb. 1, said Ashok Jain, proprietor of Mumbai-based wholesaler Chenaji Narsinghji. “Nobody wants to build inventory at current prices before the budget.”

. . . . . . . we invite you to bookmark our Gold Trading Hours page for quick reference.

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Silver shaping up to outshine gold in the months ahead

The National/Peter Cooper/1-21-2018

“But if you really want to play the commodities upturn cleverly, then buy what has been left behind in the price upturn so far, and that leaves you with silver, always loved by speculators for its volatility to the upside. Silver was the top performer in 2011, the last big year for precious metals, and if 2018 is another landmark year then it most probably will be again.”

USAGOLD note:  We might add that at 78:1 the silver/gold ratio is signalling silver’s potential to outperform gold.  Since the year 2000, every time the ratio has approached the 85:1 mark, we have had a correction, i.e., silver has gone up faster than gold, and at times, significantly. . . .


Click to Enlarge

Courtesy of GoldChartsRUs

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Is gold on the verge of breaking out?

MarketWatch/Myra Saefong/1-20-2018

“A massive move in gold, driven in part by declines in the U.S. dollar and Treasury bonds, excessive optimism in the stock market, and rising inflation, may help send prices above $1,900 an ounce this year, surpassing the all-time high from 2011. “Gold has been in a stealth bull-market phase for the past few years with little notice from most investors,” says Peter Spina, chief executive of precious-metals information provider GoldSeek.com. “Gold at $2,000 is a long shot, but not an improbable target by any means.”

MK note:  A string of gold price predictions for 2018 in this MarketWatch article echo my sentiments as expressed in the two links posted below.

Please see:
• Gold, silver predictions 2018
• The Gold Owners Guide to 2018 (Free immediate access & subscription – An in-depth look at the new year)
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U.S. government shutdown begins as spending bill fails in Senate

Reuters/Richard Cowan, Susan Cornwell, Amanda Becker/1-20-2018

“The U.S. government shut down at midnight on Friday after Democrats and Republicans, locked in a bitter dispute over immigration and border security, failed to agree on a last-minute deal to fund its operations.”

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A good day for gold, but a down week (marginally)

LATE REPORT

Gold ended the day on a high note finishing up almost $5 on the day at $1331.67. Silver also finished the day on a positive note, up 7¢ on the magic $17.00 mark.  Gold turned positive last night in Asian trading in concert with a strong Japanese yen and stayed positive through the U.S. trading session. We note that gold at one point in the day’s trading flirted with the $1338 level before reversing to close on the day’s lows.

On the week, gold was down $6.  Silver was down 22¢. For a week that began with cleaning out the dead timber (short term profit-takers), it didn’t end all that badly as the buyers returned.  For gold though, it was the end to a five week winning streak.

If you spend time in the mountains, you learn to respect the destructive power of an avalanche. . . . . .

Quote of the Day
“Last weekend I was in the Swiss Alps in the village of Zermatt at the base of the famous Matterhorn. For several days we had a relentless snowfall not seen for decades. The snow blocked the access to the village both by train and road for several days. The force of this avalanche was of a magnitude that destroyed everything in its way.  This is exactly what we will experience in the world economy and financial markets in coming years. Most avalanches occur spontaneously due to the increased load of snow. Eventually that last snowflake and the weight of the snow triggers the avalanche. . . The force of the financial avalanche coming will be similar to the the avalanche we just had in Zermatt. It is so powerful that everything in its way will be destroyed. And no human intervention can stop it.” – Egon von Greyerz, Matterhorn Asset Management


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Historic U.S. gold coins

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Economic Insights: Gold versus farmland

AgWeb/Mike Walstein/1-19-2018

“Gold prices remained relatively stable at the turn of the century and then began rising, punching through $500 an ounce in 2006. Prices soared during the financial crisis of 2008 and peaked in 2011. Farmland values moved higher as well, starting in 2007, triggered by ethanol demand. Land values peaked in 2013. During that raucous ride, the ratio dipped near 3-to-1 in the case of Illinois farmland and under 3-to-1 for Iowa farmland. Then it soared near 7-to-1 as gold prices collapsed and farmland prices continued to surge.”

MK note:  The gold/farmland ratio represents the ounces of gold it takes to buy an acre of Iowa or Illinois farmland, some of the richest farmland on earth.  The current ratio is in the neighborhood of 5.5 to 6-to-1, according to this article. Gold is now undervalued against good ground and by a fairly stout margin – a situation our farm clientele might want to consider if they are looking for a place to park investment capital for the next few years.

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Fed interest-rate rises won’t hold the gold price back

Money Week/Andrew Van Sickle/1-19-2018

“[Russ Mould of  AJ Bell] has examined the last seven cycles of US interest-rate hikes by the Federal Reserve, and notes that the metal has on average gained 86% between the first increase and the last. This time round, the Fed has hiked five times starting in late 2015, since when gold has gained 23%.”

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Holdings in exchange-traded funds soar to highest in more than four years

Bloomberg/Eddie Van Der Walt and Nicholas Larkin

“Global holdings in gold exchange-traded funds soared to the highest level since 2013 as investors got behind a rally in the metal.”

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Jim Rickards: Next financial panic will be the biggest of all. . .with only one place to turn

Gold Eagle/Mike Gleason/1-19-2018

“They grabbed the gear and they shifted it into reverse and they’re actually not dumping bonds. They’re not going to sell a single bond, but what happens is, when bonds mature, the Treasury just sends you the money, so if you bought a five-year bond five years ago and it matures today, the Treasury just sends you the money. Well, when you send money to the Fed, the money disappears. It’s the opposite of money printing. So, the Fed’s are actually destroying money, actually reducing the money supply, so they’re raising rates and destroying money at the same time. It’s a double whammy of tightening and I don’t believe the U.S. economy’s nearly as strong as the Fed believes.”

MK note: The disinflation argument in a nutshell, i.e., the Fed doing the wrong thing at the wrong time.  Rickards predicts a financial panic – the biggest of all time and one that dwarfs 2007-2008 – and safety in gold.  I would liken it to the Fed putting the rabbit back in the hat.

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Gold firming today, cues from strong Japanese yen overnight

EARLY REPORT

Gold firmed in early trading today at $1333.46, up $6.60. Silver is up 8¢ on the day at $17.01.  Both began their recoveries in Asian markets overnight following cues from a strengthening Japanese yen. As reported here regularly, gold and the yen have become traveling partners – their fortunes tied nearly lock-step to whatever vagaries affect the value of the U.S. dollar.

We  direct you above and below for coverage as the days events unfold. . . . .

Aside: If the press is to be believed, the markets have only one thing in mind these days and that is whether or not the politicians can lay aside their differences long enough to keep the U.S. government in operation. The recognizable problem is that what the politicians seem to be feuding about has more to do with their pet social issues and various palace intrigues than it does with the dirty business of revenue, spending, deficits and the burgeoning national debt, which, by the way is perilously near the $20.5 trillion mark.  The latter is where the debate should be focused, but you do not see much discussion along those lines, at least insofar as it is reported on the financial pages.  We, however, believe that there is much more affecting these markets than Washington’s machinations – stuff of a more visceral and fundamental nature with respect to individual finances and investment – and that is where we will focus our attention on these pages.

Chart of the Day

Chart note:  The one-year chart on gold shows a positive pattern of rising lows and highs – an inherently bullish trend though not a guarantee of future price action.
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Shutdown looms

Bloomberg is reporting this morning that the U.S. government is on the brink of a shutdown as politicians wrangle over immigration issues. We will keep you posted. . . .

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Gold likely to reach a high of $1,440 an ounce in 2018 – MKS PAMP

ScrapRegister/1-19-2108

“’On one side of the argument, there is a general expectation for a 50 bp FED interest rates hike and the recent U.S. corporate tax cut which in theory could be in favor of a stronger USD on the back of assets repatriation,’  said Frederic Panizzutti, MKS PAMP’s managing director of the Dubai office. ‘On the other side, the tax cut could result in a lower U.S. treasury income and logically a widening budget deficit, putting pressure on the USD.’ Gold could also benefit from a major correction in global stock markets. On top of that, jewelry and industrial demand are supportive of higher gold prices, as both sectors are expected to grow on improving global growth, the outlook added.”

USAGOLD note:  This prediction comes from one of the Swiss gold refiners at the heart of the London-Zurich-Hong Kong-Shanghai gold pipeline. It’s been reported recently that these refiners are producing and turning kilo bars for the China trade at a non-stop pace.

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Relentless’ growth could see the US topple Russia, Saudi Arabia as world’s largest oil producer, IEA says

CNBC/Sam Meredith/1-19-2018

“This year promises to be a record-setting one for the U.S.,” the IEA said in its closely-watched report published Friday. The latest monthly report from the IEA comes at a time when crude futures have climbed to highs not seen since the early days of a slump in December 2014. One of the main beneficiaries of OPEC-led production cuts is the producers’ major competitor, U.S. shale oil. U.S. oil producers are staging a dramatic comeback amid a recovering oil price that has allowed many of them to restart operations.”

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Gold rally has legs on strong China demand

TheStarOnline/1-19-2018

“Gold’s breakneck rally eased this week, but tailwinds in both physical and paper markets suggest it’s got room to run.Chinese New Year buying and option prices suggest the stars are aligning for the metal to extend its 6.5% gain in the past six weeks.”

 

 

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Investors scoop up U.S. inflation-protection bonds

Reuters/Richard Leong/1-19-2018

“Investors on Thursday pounced on $13 billion worth of U.S. bonds that offer them protection from faster wage growth and costlier goods and services as their longer-term inflation outlook rose to their highest in almost a year.”

USAGOLD note:  This same concern about inflation inhabits the gold and silver markets in the form of growing demand and price increases.

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Gold, silver biding their time, waiting for direction

LATE REPORT

Gold continued to trade sideways today finishing pretty much where it did yesterday at just below $1327.  Silver also had a lackluster day and finished at $16.93. The precious metals seem to be biding their time waiting for a good reason to take one direction or the other after the strong run-up since mid-December.

We invite you to scroll through the roster of posts below to get the general flavor.  As we move into the evening hours, gold is trading up a bit in Asia where generally speaking investors have been buying the dips.

Quote of the Day
“The world clings to its old mental picture of the stock market because it’s comforting; because it’s so hard to draw a picture of what has replaced it; and because the few people able to draw it for you have no interest in doing so.”  ― Michael Lewis, Flash Boys


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Dollar slips on jitters over possible U.S. government shutdown

Reuters/Richard Leong/1-18-2018

“The U.S. dollar fell on Thursday as traders piled into the euro, yen, sterling and other major currencies, prompted by concerns over a possible U.S. government shutdown as lawmakers struggled to cobble together a federal budget deal.”

“Politics are sabotaging economics,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. “We are going to see further pressure on the dollar if there isn’t a deal.”

 

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Here’s what repatriation means for the dollar and Treasurys

Situation Update

MarketWatch/Anneken Tappe/1-18-2018

“On Wednesday, tech giant Apple Inc. AAPL, -1.37% said it would make a one-time $38 billion tax payment related to offshore cash holdings under the new law—a move that prompted speculation other companies could soon act to repatriate their overseas cash holdings. Still, analysts remain skeptical of the effect this move by Apple and its peers could have on foreign exchange and Treasury markets. ‘There is about $2.5 to $3 trillion abroad,” said Derek Halpenny, European head of global markets research at MUFG, “and around 80% of that is already U.S. dollar-denominated.’”

Related: Apple’s repatriation drives dollar higher, gold down (Last night’s LATE REPORT)
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The Daily Prophet: Shutdown jitters pale next to inflation fears

Bloomberg View/Robert Burgess/1-18-2018

“‘Whether it’s wage fears or the rise in commodity prices, the inflation view is shifting and I repeat my belief that higher cyclical inflation in 2018 is a large underappreciated risk,’ Peter Boockvar, the chief financial officer at Bleakley Financial Group, wrote in a research note after the auction.”

USAGOLD note:  Burgess goes on to say that “the stars are aligning” for gold and “some pretty powerful tailwinds” suggest that the gains for gold are not over.

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Gold sideways today, but breaking above long-term trendline

EARLY REPORT

Gold is sideways in early trading today – up $2.20 from yesterday’s close at $1329.00.  Silver is down 3¢ at $16.99.  Both metals seem to be stabilizing at these levels after the past few days of downside related mostly to profit-taking after the strong run-up since mid-December.  Currencies, particularly the Japanese yen, are moving up against the dollar this morning – a trend that might push the metals higher before the day is done.

“Gold bugs,” says Tumblr’s Dana Lyons, “might just get their opportunity to finally move the needle here soon, however. At least, they have a potential catalyst close at hand, based on the chart of the GLD. How so? The fund is presently testing the Down trendline stemming from its 2011 all-time high. Should the GLD be successful in breaking out above that trendline (presently near 127), it may open the way for further, perhaps considerable, gains in the near-term.” (See our nearby Chart of the Day)

Chart of the Day

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Central banks are the new gold bugs

ValueWalk/Mark Melin/1-17-2018

“Who are the biggest gold bugs in the world? No, it’s not Robert Kiyosaki, who thinks gold and Bitcoin will be the de facto currencies by the year 2040, nor is it John Paulson or other hedge funds. According to an HSBC, major sovereigns Turkey, Russia and Kazakhstan are the gold bugs du jour. Central banks were big buyers of gold in 2017, gobbling up 414.9 tons. Compare this to 2016, when only 95.1 tons were bought, according to the World Gold Council.”

USAGOLD note:  And that doesn’t include what China accumulated in one way or another – a number that, in our view, would probably at least double the 414.9 tonnes cited by the World Gold Council. Ultimately, at some point along the way, official sector demand running at these levels will reduce the physical supply available to everyone else and likely push up prices.  At 800+ tonnes, if that is the right number, central bank off-take equals about one-fourth global mine production – a big number in the scheme of things.

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Bitcoin’s nouveau riche run to gold as cryptocurrency crashes

Bloomberg/Eddie Van Der Walt and Samuel Potter/1-18-2018

“Amid the wild Bitcoin ride that’s wiped more than 40 percent off the cryptocurrency’s price in a month, a pattern may be emerging: sellers are switching out of digital gold and into the real thing.”

USAGOLD note:  Is anyone surprised?  A good portion of that mined Bitcoin “money” will likely find its way to real money as the crypto-saga unfolds.  Once again, the “real” financial marketplace is treating it more like a security than a form of money.

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Bitcoin isn’t the future of money

How should central banks proceed with cryptocurrencies? Very carefully.

Bloomberg/The Editors/1-17-2018

“Blockchain technology gives Bitcoin two crucial characteristics — it can be exchanged peer-to-peer without the need for a trusted intermediary, and it lets transactions be anonymous. In both these ways, Bitcoin resembles physical cash. But whereas physical cash is the liability of a government, with a central bank controlling its value, Bitcoin is a liability of nobody. This is its fatal flaw as a currency. There’s nothing to stop its value from falling to zero.”

USAGOLD note: Cryptocurrency has one other fatal flaw in terms of being valued as money.  Unless it finds some way to stabilize its value and narrow its wild price fluctuations – its volatility – investors and consumers are unlikely to view it as a reliable means of saving and exchange.  At this juncture, Bitcoin fits more the definition of a security than a currency and it should be issued to the public with the same caveats.

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