AXL Capital Management would like to highlight two key topics:
- US consumer prices at 9-month lows suggest a lower rate hike in December.
- Cryptocurrency bias could be another boost for Gold.
Will it be a significant rally or a bull trap?
The Fed seems poised to make a small rate hike in December because of this cooling of inflation, then $1,850 and higher per ounce could be on the way.
Analysts after noting that Gold futures hit 11-week highs (breaking above the $1,750 per ounce barrier) commented that:
"Gold prices are rising as a cold inflation report has made markets confident that the Fed can slow its pace of hikes...and possibly end tightening after the March FOMC meeting."
Gold led commodities in a broad-based rally on Thursday after the U.S. consumer price index expanded just 7.7% over a 12-month period in October, versus 7.9% growth forecast by economists and against annual growth of 8.2% through September. Historical data shows it is the lowest annual inflation reading since January.
The dollar index, which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, meanwhile, fell 1.9% to below the 108 mark, versus Thursday's three-week high above 113.
It's the dollar's biggest one-day percentage loss since Oct. 27, 2011, when it also fell 1.9%.
But it's not just the Fed - and the falling dollar - that is providing the wind in Gold's sails.
The bias in the cryptocurrency market could be another boost now for the yellow metal.
Gold is probably gaining at least some of the money that had flowed out of Bitcoin over the past week when the king of digital currencies fell 25% on concerns related to the FTX crypto-exchange.
Gold now looks relatively safer than digital currencies and has gained new respect which could mean higher allocations that previously would have gone to crypto.
Until we see which players were impacted by FTX and whether other exchanges are vulnerable to a liquidity crisis, any rebound in all things crypto could fade.
Cryptocurrency stocks plunge on growing fears
FTX's rival and potential buyer of its non-U.S. operations, Binance, decided to walk away from the bailout deal last Thursday.
FTX's collapse could leave long-term consequences.
Stocks exposed to cryptocurrencies, including Coinbase (NASDAQ:COIN), MicroStrategy (NASDAQ:MSTR), Galaxy Digital (TSX:GLXY) and Block (NYSE:SQ), among others, are deep in the red this week on growing fears that the FTX event will leave long-term consequences for the cryptocurrency industry.
FTX was seen as one of the so-called safe crypto players and its demise is raising concerns that other key crypto companies could be vulnerable here.
MicroStrategy, a software-as-a-service (SaaS) business that is heavily invested in Bitcoin, saw its shares fall around 30% this week following the collapse of FTX. The company held approximately 130,000 BTC, or about 0.62% of the cryptocurrency's total circulation. The company's former CEO, Michael Saylor, is known for his deep belief that bitcoin represents a valuable store of value and a reliable hedge against inflation.
Also, the recent drop in Galaxy Digital's stock is due to the company's considerable exposure to FTX's native token, FTT. Earlier this month, Galaxy reported a $76.8 million exposure to FTX, of which $47.5 million was in the process of being retired.
The price of FTT is down nearly 90% this month, reflecting fears that FTX is headed for bankruptcy. Global cryptocurrency market capitalization also plummeted, reaching levels below $800 billion for the first time since January 2021. Bitcoin sank below $16,000 for the first time since 2020.
Investors now expect the U.S. Securities and Exchange Commission (SEC) to take an even tougher approach to regulating crypto. This type of regulatory environment may benefit some cryptocurrency-focused companies, such as Coinbase, according to analysts.
What happened to FTX?
Pressure on the FTX exchange began to build after CoinDesk reported that the balance sheet of Alameda Research, a cryptocurrency trading firm also owned by FTX CEO Sam Bankman-Fried, was inflated by the FTX native token FTT.
The report said Alameda's FTT holdings totaled $5.8 billion, in addition to $1.2 billion and $2 billion in Solana and shares, respectively. In addition, the company also had $2.2 billion in loans that were guaranteed by FTT.
Shortly thereafter, Binance CEO Changpeng "CZ" Zhao said his cryptocurrency exchange is offloading all of its $530 million worth of FTT holdings due to "recent revelations" about FTX. Although CZ did not specify which disclosures it was referring to exactly, it was not hard to conclude that it was probably referring to the Alameda-related news.
Binance's decision triggered a massive sell-off in the cryptocurrency market after investors withdrew $6 billion worth of cryptocurrencies from FTX in just 72 hours.
Zhao then offered to acquire FTX and save the rival exchange from a "liquidity crisis." Binance signed a non-binding agreement to buy FTX's non-U.S. assets in a rescue move, though that did little to stop the sharp sell-off in the market. The optimism was short-lived, however, as Binance eventually decided to back out of the deal.
"As a result of corporate due diligence, as well as recent news reports regarding mismanaged customer funds and alleged investigations by U.S. agencies, we have decided that we will not pursue the potential acquisition of FTX.com," said a Binance spokesperson.
Binance had initially hoped to help FTX customers by providing liquidity, but "the issues are beyond our control or ability to help. Every time a major player in an industry fails, retail consumers suffer," Binance added.
The potential downfall of one of the world's largest and most trusted cryptocurrency exchanges "is not good for anyone," Zhao added. Recent reports show that FTX was potentially using its native token to leverage its numerous positions and tap into customer funds for controversial purposes.
One such example is the redemption of FTX's sister firm Alameda Research, which was potentially redeemed by FTX in the second quarter.
Like TerraUSD (UST) and LUNA in May, FTX's price plunged after Zhao announced that Binance was liquidating its FTT holdings. The sell-off spread to nearly every asset in the digital asset industry, including cryptocurrencies and the aforementioned crypto-exposed stocks.
Crypto.com's native token plunges as FTX collapse fuels fears of a bias trend
Cronos, the native token of Crypto.com fell to a 22-month low on Monday amid growing scrutiny toward centralized exchanges following the collapse of major player FTX earlier this month.
The value of the cryptocurrency Cronos plunged 28% to $0.0557, halving in the past week, as investors fear a potential liquidity crisis similar to that of FTX.
Concerns about the exchange's financial situation intensified over the weekend after data from the blockchain showed it had accidentally sent about 82% of its Ethereum reserves - roughly $400 million - to a Gate.io-linked wallet in October.
Although the funds were recovered, traders said the transfer contradicted Crypto.com's claims that all user funds are held offline in cold wallets.
The exchange, which also recently disclosed its cryptocurrency holdings, drew ire for holding more than 20% of its reserves in the Shiba Inu meme coin.
The revelations came shortly after the collapse of FTX, which was accused of misappropriating customer funds and failing to meet withdrawals. Sentiment towards centralized operators, such as Crypto.com, was severely affected by the collapse, with several industry participants calling on traders to withdraw their funds from centralized exchanges.
Binance CEO ChangpengZhao also lashed out at Crypto.com, warning users to "stay away."
While Crypto.com CEO KrisMarszalek assured traders that their funds were safe, a growing number of social media influencers advised users to withdraw their funds from the platform.
Losses in CRO far outpaced declines in the general cryptocurrency market in the last 24 hours of news of the events. Bitcoin plunged 4% and hovered near two-year lows, while Ethereum lost 6%.
Tokens on other centralized exchanges also fell. Binance's token fell nearly 5%, while OKEx's native token lost 6%.
Lender BlockFi also recently suspended withdrawals due to its exposure to the beleaguered exchange.
Will bitcoin recover from FTX's "black swan"?
Despite falling 25% in days, the BTC/USD pair is not doomed as a result of the insolvencies affecting FTX, Alameda Research and possibly other major cryptocurrency firms.
The meltdown, while sudden, is not so different from liquidity crises earlier in Bitcoin's history.
An accompanying chart points to similar "black swan" moments from the past, dating back to the Mt. Gox hack in 2013.
Two other notable events were the Bitfinex Exchange hack in 2016 and the market crash during the COVID-19 pandemic in March 2020.
Summary
Impact on regulation:
Regulators are likely to come down hard on the cryptocurrency industry after the fact. What is incredible, is that Sam Bankman-Fried (SBF) had lobbied for months in Washington for cryptocurrency regulation, at the same time of allegedly engaging in risky activities with client funds (for which there is still no evidence). SBF was the second largest donor to the Democratic party (after George Soros), which worked with him on major cryptoasset bills pending review in Congress. The proposed crypto bills are likely to be modified, potentially being delayed for several months. This is an embarrassing turn of events for Democrats.
What changes are needed in the industry:
It is clear that transparency and cryptographic proof of reserves are necessary for customers to feel confident that their assets are not being lent or used for risky activities. Kraken has already implemented this and Binance promises to do the same in the near future.
There are also concerns about the growing dominance of Binance, which, prior to this debacle with FTX, processed about 53% of all crypto trades in the spot and derivatives markets by number of trades and about 30% of the market value.
Fears of trend bias:
Most cryptocurrency values have fallen significantly over the past five days. Bitcoin is down 20%, Ethereum is down 24% and Solana is down 54%. Solana has fallen more than the others, as Alameda Research was an early investor in initial coin offerings of Solana in 2021, and Alameda is said to have held Solana with and without stakes worth billions of dollars.
Future of crypto assets:
We believe there is still great potential in cryptoassets. As with most new technologies, the early stages of technology development are prone to problems, missteps and setbacks. Some of the most problematic business models in the crypto industry have been centralized offshore crypto exchange centers (Mt Gox, BitMEX, FTX) and crypto brokers (Voyager Digital). Some fundamental changes are needed to make the industry more transparent and reliable with less reliance on a few players. One of the solutions could be the proof-of-reserves model, which we discussed above.
Future of the Gold price:
We looked at two scenarios:
- Support at $1,705 which was the session low reached the day before the October CPI release.
- Support at $1,620 which was the yearly low reached on September 28, 2022 when the dollar index reached its high for the year.
In both scenarios, we see resistance at $1,850.
