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I was hoping to just discuss the potential collapse of the world’s largest Bitcoin exchange this morning; but lo and behold, the list of global “horrible headlines” is too large, and broad, to ignore.  There are simply too many “Black Swan-worthy” topics to discuss, such as the increasingly likely, potentially near-term default of Puerto Rico’s $70 billion of debt.  Or how about the historic California drought that Governor Jerry Brown calls an “unprecedented emergency” – which is likely to cost the already bankrupt state $11 billion of desperately needed tax revenues?  Not to mention, the impact this natural disaster could have on food prices – given that one-third of all U.S. fruits and vegetables are grown in California!

Then you have that “little matter” of the rapid slowing of the world’s growth engine; as not only is economic data signaling the slowest Chinese growth in two decades, but history’s largest credit bubble is clearly on the verge of collapse.  Will the Chinese government “bail it out” by leveraging itself further, via the PRINTING of more money?  You bet it will; as just in January alone, the PBOC printed nearly three times more money than the Fed and Bank of Japan combined!

Then, of course, there’s the morbid European GDP numbers, as third quarter growth was a horrific 0.3%, following the second quarter’s comatose 0.1% reading; a ten-year high in Australian unemployment; the “secret” publication – and immediate removal – of U.S. government projections of a $205 trillion “unfunded liability”; expectations of a record Japanese trade deficit on Thursday; and oh yeah, the granddaddy of blaring red flags – validating what we wrote last June in Capital Controls, here we come

Honestly, even I had to do a double take when I saw that, this weekend, the Italian government instituted an incredible 20% withholding tax on all inbound wire transfers.  In other words; pure, arbitrary theft, under the guise that all wires must be proven – after the fact – to not be legally considered taxable income.  This draconian decree, retroactive to February 1st, was clearly undertaken because the Italian government – you know, the one that collapsed just last week – is in dire financial condition.  Depending on how bureaucratic the process of “proving” wires are legitimate becomes, this can clearly be construed as a de facto confiscation or “bail in.”  And still, people hold their life’s savings within the financial system; in most cases, earning ZERO interest whilst it gets eaten away by inflation!

Anyhow, on to the namesake of this article; i.e., the “store of value” that only gold and silver have provided throughout history – as highlighted, in spades, by the possible collapse of Mt. Gox, the world’s largest Bitcoin exchange.  Three months ago, we wrote of why Bitcoins, though an intriguing “alternative currency” concept, would never conform to the definition of money.  And watching the latest round of Bitcoin “growing pains” (putting it mildly), we could not be more vehement in our views; even agreeing with Jamie Dimon – for once – that Bitcoin is a “terrible store of value.”

In a nutshell, our biggest issue with Bitcoin – the investment – has been its lack of intrinsic value.  Sure, Bitcoin supporters say such value stems from the scarcity imposed by its programmers, as well as utilitarian usage as a medium of exchange.  However, when it comes down to it, who’s to say Bitcoin’s supply won’t eventually be expanded – with a few, timely keystrokes; just as fiat currencies’ were, when the gold standard was abandoned?  Moreover, Bitcoin is only acceptable so far as the public has confidence in it.  Again, just like fiat currencies; so long as the “full faith and credit” of the issuer is not questioned.

Apparently, Bitcoin has other key flaw; as aside from the aforementioned intrinsic value issue, governments from China to Russia have been attacking its validity.  Moreover, it’s becoming painfully obvious that Bitcoins are not even fungible; i.e., all Bitcoins are not created equal.  Watching the plunge of Mt. Gox Bitcoin prices this past week, due to a combination of incompetence, vulnerability and according to some accusers, fraud; demonstrates exactly what we’re speaking of.

As of Sunday night, the Mt Gox exchange was several weeks into a self-imposed ban on Bitcoin withdrawals; and despite claiming cash withdrawals were still enabled, it’s quite clear essentially nothing was leaving the exchange.  Even Bitstamp, the de facto Bitcoin leader following this Mt Gox fiasco, itself prohibited withdrawals for four days last week; like Mt Gox, claiming technical issues related to potential hacking.  Thus, whether the so-called “fixes” they’ve claimed to create actually prevent further Bitcoin thefts – let alone, when new hacking methods arise; it’s quite clear the integrity of “digital assets” can NEVER be that of real money.

And as for the fungibility issue, it’s one thing for differing Bitcoin exchanges to trade at slight price variances due to differences in liquidity, fees and other marginal factors.  However, the price of Mt. Gox Bitcoins has plunged to a 50+% discount to those on other exchanges – such as Bitstamp and BTC-e; which frankly, makes no sense at all.  Some might say people have been selling Mt Gox Bitcoins due to a belief that in a bankruptcy scenario, holding cash balances are more favorable than Bitcoins (talk about a lack of intrinsic value!).  However, such an assertion makes little logical sense, in our view; as no matter how one slices it, the price of Bitcoins should be as ubiquitous as those of gold or silver coins.

Anyhow, as we head into what could be yet another tumultuous week, starting with – my gosh, stop the presses – Japan’s horrific fourth quarter GDP figures, in which “growth” was just 0.25%, compared to a 0.70% estimate and last quarter’s equally measly 0.45%; be prepared for assets possessing true “store of value” characteristics to start really asserting themselves on the global stage.  As for the undisputed historical kings of wealth storage, gold and silver are up $8/oz. and $0.30/oz., respectively this morning, having fought through the 26th “Sunday Night Sentiment” attack of the past 27 weeks to do so!

24hr Gold Silver Charts 2-16-2014

Remember, while Bitcoin; other “crypto-currencies”; and any other attempt to create value out of thin air may generate varying degrees of speculative acceptability at different snapshots in time, the fact remains that ONLY physical gold and silver intrinsic values and historical track record have proven to protect investors over time; particularly amidst collapsing fiat currency regimes, as we are only seeing the beginning of today.