Gold bugs around the world got a shock a few weeks ago when a tiny Canadian start-up called BitGold bought venerable GoldMoney, the second biggest (after BullionVault) precious metals storage firm.

Now come the questions. Is this a case of a flashy tech company using its temporarily-inflated stock to buy real assets, a kind of AOL/Time Warner deal which goes sour when the new tech turns out to be a bubble? Or are these the young visionaries who finally solve the puzzle that eluded their elders? 

First, a little digression: Back in the late 1990s while writing mostly about the excesses of the dot.com bubble, I was looking for a more optimistic theme. After interviewing GoldMoney’s James Turk for a couple of magazine articles, I fixated on his and others’ attempts to use the Internet to turn gold back into a functioning currency. This was a libertarian fantasy made real, allowing people to keep their spare cash in sound money while bypassing the increasingly dysfunctional, predatory banks with their hidden fees and stupid rules. 

Lots of magazine articles and book proposals followed, but despite gold’s decade-long bull market, its digitization failed completely. eGold, the first mover, soon discovered that anonymity meant money laundering and was shut down by the police. GoldMoney required its users to disclose their identities, thus avoiding that legal minefield, but still ran up against regulations designed to limit the ability of alternative currencies to compete with central bank fiat. It eventually gave up, focusing instead on the boring but lucrative storage business.

Now, at the dawn of the age of cryptocurrencies, BitGold is reviving and updating the concept by storing bullion for customers and letting them spend their gold online or via debit cards. Among its cool new features is a tax calculator that figures users’ capital gains/losses for the countries that tax gold as a commodity. 

It’s too soon to tell whether BitGold will succeed where its processors failed, but the early debate is, as you’d expect, lively. On the negative side, UK financial journalist (and author of a book on bitcoin) Dominic Frisby makes a cogent case for its probable failure. Here’s an excerpt:

Don’t touch this gold and bitcoin combo with a ten-foot bargepole

Last week, Canada saw the initial public offering (IPO) of BitGold.

It opened with a lot of publicity and a bang.

Today we consider BitGold.

We don’t ask whether you should run away – but how fast.

Bitcoin plus gold = sexy name, but not a lot of substance

BitGold is listed on the Venture Exchange in Canada with the rather handy ticker of XAU.V.

There are 36.6 million shares outstanding, of which 20 million are controlled by insiders. Based on Friday’s close at C$4.14 per share, it has a market capitalisation of around C$161m.

It has C$9m cash and, with 6.4 million warrants (3.9 million exercisable at C$1.35), another potential C$5m in the pipeline. The marketing budget this year is C$5m.

Among its early investors are, notably, Soros Brothers Investments and Sprott Asset Management.

The idea is for the company to become a PayPal for gold. You can go into a coffee shop or a grocer’s and buy everyday items with gold. You can also buy and store gold.

The company makes its money by charging 1% on transactions. For now, storage is free (although that is going to be an issue going forward – gold costs money to store).

As blogger Otto Rock notes, last year BitGold’s founders were paid in shares worth 3.3c a piece. The seed placements and pre-IPO fund raisings were at 90c plus warrants. The stock went public at C$2.70. After hitting C$4.50 on Thursday, the stock closed the week at C$4.14. Almost 701,000 shares traded on Friday.

Some people have done very well out of this already. But the business has hardly got going yet. It has very little market share, let alone profit. As someone who’s seen what Vancouver is capable of, this has set all my alarm bells off.

There’s been a lot of hype and now somebody is selling. There’s an expression for that. Can’t for the life of me remember what it is.

Frisby goes on to point out that there’s nothing preventing regulators from strangling this newborn in its crib as they did with GoldMoney and eGold, and that the concept of digital gold is inherently flawed because anyone with both fiat currency and gold would logically save the gold and spend the fiat. 

These are good points. The regulators now gearing up to counter bitcoin can easily adapt to digital gold. But the idea that no one will want to spend gold is debatable. A checking account requires currency to be on deposit, where it can depreciate before being spent. Better to have that cash sitting in an asset like gold that will appreciate over time. Presented this way, a digital gold account might be an attractive combined savings/checking account for people who understand money. 

And the upside of a functioning digital gold currency might be spectacular: If gold begins to flow into such accounts, the added buying pressure would send the price higher, which would make it even more attractive relative to fiat currency, leading to more buying, etc. The resulting feedback loop would be fun to watch. 

So the prudent approach to BitGold is the same as for bitcoin: Acknowledge that the idea has promise, sample it if you’re so inclined, but don’t trust it with large amounts of capital until it’s been tested by regulators, the markets, and time.

USDCAD Overnight Range 1.2455-1.2560              

Optimistic analysts looking for a better-than-expected US nonfarm payrolls report were rewarded this morning when NFP gained 280,000 jobs, far surpassing the 225,000 forecast. The US dollar soared against the G-10 currencies as today’s report, which included a gain in the important hourly earnings component (0.3%), keeps a September US rate hike on the table.

The Canadian employment data was even more impressive than the US data as it beat the forecast by a factor of 5, coming in with a gain of 58,000 jobs vs. expectations for a 10,000 gain. Unfortunately, the Canadian data suffers from some credibility/reliability issues and although USDCAD declined on the initial release, it quickly reversed itself and probed key resistance in the 1.2550-60 area.

The other important meeting today was in Vienna.  Opec has announced that they will keep the current production target of 30 million barrels per day.  That doesn’t mean that members will adhere to the limit, just that there is a reference level. The news, while not unexpected has allowed WTI to rebound from this morning’s low and may have provided a modicum of support to the Canadian dollar which has drifted away from this morning’s high. (Currently 1.2532).

Overnight, trading was subdued. FX traders have ignored the late yesterday headline that Greece has decided to defer today’s IMF payment until the end of the month. Greece has four IMF payments due in June which means another two of them will be deferred making June 30th a very important date for the Eurozone.

USDCAD technical outlook

The intraday USDCAD technicals are bullish while trading above 1.2475 with a break above 1.2560 extending gains to the 1.2600-20 zone.  A break above this level targets 1.2820.  A move below 1.2475 will send USDCAD down to 1.2410 and if that level breaks, to 1.2360.

The longer term technicals point out that USDCAD is in a steady uptrend while trading above 1.1980. The shorter term downtrend from March which is in the 1.2620 area is being tested.  A failure to break above this zone will result in further 1.2000-1.2600 consolidation.

Today’s Range 1.2480-1.2560

Chart: USDCAD daily with support and resistance noted             Larger Chart

USDCAD Overnight Range 1.2439-1.2495      

USDCAD traders were rather indecisive overnight. The Loonie bounced around in a fairly tight range, torn between USDCAD selling on dollar weakness vs. G-10 currencies and EURCAD demand stemming from the rise in EURUSD. However, EURUSD has given back all of the overnight gains following today’s Jobless claims data and USDCAD is close to the overnight peak.

EURUSD is the story. The German bund market is on fire with 10 year yields soaring. The bund sales have led to demand for EURUSD which has turned the short term technicals bullish. The break of the 38.2 % Fibonacci retracement level of the Dec.14-Mar.15 range at 1.1285 targets 1.1775, the 61.8% level.

In Asia, weaker than expected Australian data pushed AUDUSD lower. Over in Japan, comments from a BoJ board member stating that “excessive JPY strength has been corrected” undermined USDJPY.

There isn’t any additional US data to influence trading today but Canada’s Ivey PMI release will create excitement depending on the size of the miss from the 55.5 forecast level. For the most part, traders will mark time until tomorrow’s payrolls reports.

USDCAD technical outlook

The intraday USDCAD technicals are modestly bullish with today’s move back above 1.2490 which targets a re-test of the 1.2550 level. A failure to extend gains above 1.2550 suggests further 1.2410-1.2550 range trading. For today, USD Support is at 1.2460 and 1.2420.  Resistance is at 1.2510 and 1.2530

Today’s Range 1.2460-1.2530

Large Chart

USDCAD Overnight Range 1.2389-1.2508    

Yesterday’s USDCAD slide halted in Asia and by the time the smoke cleared, USDCAD was back above 1.2500, albeit only briefly as EURUSD buyers have been relentless.  Overnight, the OECD announced a downgrade to their global growth forecasts. They cut Canada’s growth outlook (the second time this year) to 1.5% (previous 2.2%) while bumping up 2016 growth to 2.3% from 2.1%., citing the damaging effect on the domestic economy from low oil prices. However, the reality is that USDCAD merely followed US dollar moves and ignored the OECD report.

It has been an active start to the New York session. The prospect of a Greece deal continues to lift EURUSD, which is currently at 1.1210, as traders ignore headlines that the German Finance Minister says “optimism on Greek negotiation progress is not justified”.  Traders also ignored better than expected US trade data and an ADP print of 201K (Forecast 200k).  The ECB left rates unchanged and Mr. Draghi’s press conference didn’t deliver any surprises.

In Asia, AUDUSD jumped on a strong GDP print but the gains weren’t sustained. In Europe yesterday’s dollar sellers became dollar buyers allowing the US dollar to rally across the board ahead of the ECB meeting while traders complained of poor liquidity ahead of the ECB meeting.  GBPUSD was hit harder on a poor PMI showing.

USDCAD technical outlook

The intraday USDCAD technicals are bearish following today’s failure to extend gains above 1.2510 and its subsequent retreat below 1.2460 pointing to further losses back to 1.2370.  For the balance of the week, the existing 1.2370-1.2520 range will likely remain intact until Friday’s payrolls reports from the US and Canada.

Today’s Range 1.2380-1.2480

Chart: USDCAD 4 hour Fibonacci target                       Larger Chart

USDCAD Overnight Range 1.2436-1.2533  

The US dollar is down across the board continuing the trend which began overnight following a tsunami of headlines pertaining to the Greece and EU debt renegotiations. The USD gave back all of yesterday’s post US ISM gains and then some.  The headlines have been coming fast and furious and due to the lack of any meaningful US data have been given an exaggerated level of importance. Nevertheless, EURUSD has soared to as high as 1.1190 from 1.0950 in New York trading.

The Reserve Bank of Australia (RBA) got the ball rolling with what has been described as a “less-than doveish” statement when a reference to an easing bias was omitted. AUDUSD jumped to 0.7702 from 0.7625. In Japan, early demand for USDDJPY which pushed it above 125.00 didn’t last and the currency pair retreated.

The European session was rife with rumours about a pending/last minute Greece debt deal which came to a head with the most recent headlines. Those rumours underpinned EURUSD as did better than expected German employment data.  UK data was also positive and GBPUSD gained ground.

USDCAD has plunged in concert with the broad US dollar weakness, dropping from 1.2530 to take out support at 1.2490.  It has tested the second level of support at 1.2440 which has held. The Greek tale is only part of the story this week. Friday’s US nonfarm payrolls could kick off another bout of dollar buying on an upside surprise.

USDCAD technical outlook

The intraday USDCAD technicals are bearish following the break of support at 1.2490.  A break below 1.2440 would suggest a short term top is in place at 1.2560 which would be confirmed by the loss of 1.2410. A move below 1.2410 would target 1.2320. Failure to break 1.2440 suggests additional 1.2440-1.2560 consolidation until Friday.

Today’s Range 1.2430-1.2490

Chart: USDCAD 4 hour Fibonacci target

Larger Chart