Text size

Sound as a bitcoin? That doesn't sound as if it will enter the lexicon, at least not anytime soon, after the so-called virtual currency soared and crashed last week, not long after bursting into the consciousness of the financial world.

The Bitcoin was supposed to be a 21st-century monetary unit, an alternative not controlled by any government and therefore immune to its manipulation. While Bitcoins have been around for a few years as an intellectual exercise among libertarian-inclined computer geeks, they only took off in recent weeks as actions of various governments to manipulate—or in the case of Cyprus, confiscate—money balances went to unprecedented extremes.

In May 2010, U.S. computer programmers supposedly paid 10,000 Bitcoins—then worth less than a cent apiece—for a couple of pizzas. That was long before the currency's bubble and bust last week. At its momentary peak, a Bitcoin fetched $266, which would have valued those pizzas at over $2.6 million (I don't know if toppings would be extra). But by week's end, the price of a Bitcoin had crashed to $54.25. While it was beginning to be used as a medium of exchange, the Bitcoin clearly wasn't fulfilling money's other function, to be a stable store of value.

Ben Levisohn, Barron's emerging-markets blogger and columnist, who has been covering the Bitcoin before it emerged into the mainstream, pointed out in a post Friday the similarity to another burst bubble of a generation ago—the Hunt Brothers' attempted corner of the silver market in late 1979 and early 1980.

You'll recall those days of yesteryear, when the dragon of inflation had yet to be slain by Paul Volcker, then head of the Federal Reserve, and paper currencies were held in suspicion, if not outright contempt. Gold also was in the process of hitting its then-peak of $850 an ounce. In any case, Ben notes, silver spiked nearly 600%, to more than $40 an ounce, but by May 1980, the metal had collapsed by 70%, to a tad over $12. "The lesson for investors: When you see something quintuple its price in a matter of months, take some profits," he counsels. (The post can be viewed here, with some illuminating charts of the two bubbles and busts.)

Skepticism about government fiat currencies now, if anything, is even greater, than it was three decades ago. The Bank of Japan has embarked on a massive money-printing scheme that has lifted Japanese stock prices nearly 50% but effectively devalued the yen 20% since late last year when it became apparent that Abenomics—named for the new prime minister, Shinzo Abe—would be adopted. (The outcome may be rather less salubrious than new Japan bulls expect, see Does Japan Face a Debt Apocalypse?.) Meanwhile, the Fed continues on its trillion-dollar-a-year bond-buying program, joined by virtually every other central bank around the globe in expanding its balance sheet. (The European Central Bank is a notable exception, letting its balance sheet shrink lately. The next crisis, when—not if—it comes will assuredly spur the ECB back into action.)

So, it is incongruous that gold—money that can't be printed, just minted—would enter a bear market Friday. To be sure, a number of big Wall Street banks had declared the end of the bull market in bullion in recent weeks. Yet, if the Street were a redoubtable forecasting indicator, analysts wouldn't have been falling over themselves to boost price targets on Apple (ticker: AAPL) to infinity and beyond last year when the stock crested at $705—before its long slide to $429.80 by Friday's close.

Gold entered so-called official bear market territory by dropping 20% from its peak of $1,900 an ounce, hit in the speculative frenzy of September 2011. On Friday, gold fell through the $1,500 mark, with the active nearby Comex futures shedding 5.7%, or $88.80, to $1,476. The real story was told by the action in the SPDR Gold Shares exchange-traded fund (GLD), which slid 4.7% Friday as 55 million shares traded, five times the average daily volume of the past three months. Barrons.com's technical guru, Michael Kahn, relates that the bottom fell out when GLD (it's better known by its ticker rather than its proper name) broke below last May's lows.

Beyond price, the assets of GLD tell the story of the end of the gold frenzy. Barron's ETF expert, Brendan Conway, notes that GLD briefly was the world's biggest ETF, with assets north of $77 billion in August 2011, topping the SPDR S&P 500 ETF (SPY) for a time. By the end of 2012, GLD still had $72.2 billion. But by last Thursday, its assets had shrunk by 18%, to $59.4 billion. No doubt Friday's collapse brought a further exodus, which certainly added to the selling pressure.

The carnage wasn't confined to the yellow metal. Silver also fell 5%, with its ETF, the iShares Silver Trust (SLV) plunging that percentage on 3.5 times recent average volume. And gold-mining stocks, which already had substantially unperformed the metal, took a similar hit, with the Market Vectors Gold Miners ETF (GDX) losing 5.7% on 2½ times recent average volume.

In a piece published in Barrons.com's Wall Street's Best Minds feature, Tocqueville Funds' John Hathaway contends that the selloff in gold was "a contrarian's dream scenario." Writing before Friday's 5% plunge, he noted the contrast between the widespread disaffection with the metal, encapsulated in a New York Times Thursday article, with the positive fundamentals for it: negative real interest rates, worldwide quantitative easing, and governments' new confiscatory inclinations, as demonstrated in Cyprus.

Meanwhile, the global debasement race to the bottom has produced some absurdities. Late Friday, the U.S. Treasury said that it is monitoring Japan's monetary expansion and would press Abe to refrain from competitive devaluation. With the Fed's printing press operating in overdrive, it's truly a case of the pot calling the kettle black.

The rush to the Bitcoin may have been a speculative bubble, but it may also represent an inchoate search for an alternative to government-controlled paper currencies.

Gold would fit that bill, but it appears caught up in a liquidation of commodities, such as base metals and petroleum products, and as a component in commodity indexes. Commodities are produced to be consumed. Gold isn't consumed; virtually all the gold ever extracted still exists as a store of value or a thing of beauty. That makes it fundamentally different from commodities.

Some day, an alternative to gold that doesn't require the tedious and expensive mining, storage, and transfer of the metal may be conjured. Those difficulties gave rise to paper money, which is being abused. For now, gold no longer is loved, which, to an independent-minded contrarian investor, only adds to its allure.

IN CONTRAST, THE QUEST for stability is evident in the equity market, where the most ardently desired stocks are those that act the most like bonds—paying a decent yield while exhibiting a lack of volatility.

Those attractive attributes have been encapsulated in an ETF, the PowerShares S&P Low Volatility Fund (SPLV), which has not only levitated in a virtual straight line since the turn of the year, but also has seen its assets burgeon. Through Thursday, the low-volatility ETF was up 15.6% in 2013, some 26% better than the 12.4% gain for SPY, according to Morningstar. And the exchange-traded fund has attracted $1 billion this year, bringing its assets to more than $4 billion, not an inconsiderable increase.

The PowerShares ETF features stocks that not only are remarkable for their lack of stomach-churning swings, but also that they trade at or near all-time highs: Johnson & Johnson (JNJ); H.J. Heinz (HNZ), whose attributes have attracted Warren Buffett's Berkshire Hathaway (BRKA, BRKB); PepsiCo (PEP); General Mills (GIS); Consolidated Edison (ED), and SCANA (SCG).

And while they're not among the top 10 holdings of the ETF, Colgate-Palmolive (CL), Clorox (CLX), and Kimberly-Clark (KMB) all are at or near historic peaks.

Meanwhile, Fastenal (FAST), another homely company, which distributes industrial, instead of consumer, goods, has been rolling over. It has slipped 7% from its recent high, reached in February. That is consistent with the slide in industrial commodity prices, notably Dr. Copper, or iron-ore prices, which have kept the pressure on Cliffs Natural Resources (CLF), which ticked higher on some buying a couple of weeks ago by bottom-fishers, but since has slid back.

In an economy of slow growth and low interest rates, assured cash flows attract high valuations. So it's no wonder that an ETF that is composed of companies peddling pedestrian products would be a lure to investors seeking bond-like attributes.

Technology companies, which also may boast free cash flow and triple-A balance sheets, don't enjoy the same sort of investor ardor.

Witness the pummeling of Microsoft (MSFT) on last week's news of a plunge in personal-computer shipments in the first quarter. Or the valuation of Intel (INTC), trading at just about 11 times forecast earnings, little more than half the price-earnings multiple of toilet-paper and soap peddlers.

Low interest rates and low growth induce investors to bid up investments that produce stability and cash flows. As earnings season ramps up this week, investors' demand for certainty and stability may be tested.

Alan Abelson is out this week.

E-mail: randall.forsyth@barrons.com