Facebook enters dangerous waters with Libra cryptocurrency
At worst, this might lead to a world dominated by a mono-bank
Martin Wolf
Last week, the Bank of England released the result of an independent review of the future of finance, together with its response. As if to prove the importance of these issues, Facebook and 27 partners announced a plan for a global digital currency to be called Libra, and an associated payment system. How should one assess the significance, promise and risks of these developments? How should the regulators react? The answer is: with caution.
The information revolution, now augmented by artificial intelligence, will surely revolutionise finance. It offers huge potential benefits, in the form of faster and cheaper payments, superior financial services and better risk management. Already, we see a marked decline in the use of cash and explosive growth in digital payments. In China, the revolution in payment technology, led by Alipay (now part of Ant Financial) is extraordinary. Facebook is trying to create a rival. Note: the US is here following China.
Yet finance is also a critical infrastructure. A financial breakdown is likely to create a huge economic crisis. Ill-understood innovation has often proved a midwife of such calamities. It is vital therefore to ensure that the implications of big innovations, such as Libra,are understood. Mark Carney, governor of the BoE, argued last week in his Mansion House speech that the bank “approaches Libra with an open mind but not an open door”. The mind cannot be entirely open, however.
A first question must be whether we can trust the sponsor of so sensitive an innovation. Facebook has been grossly irresponsible over its impact on our democracies. It cannot obviously be trusted with our payments systems. Facebook has an answer: it has just one vote in the Libra Association, which will have independent governance located in Geneva. The aim is to have 100 members by the launch in 2020. But Facebook seems likely to dominate Libra’s technical development. That will surely give it predominant influence.
Randal Quarles, chairman of the Financial Stability Board, is right to tell leaders of the G20 nations, meeting in Japan, that “a wider use of new types of cryptoassets for retail payment purposes would warrant close scrutiny by authorities to ensure that they are subject to high standards of regulation”.
Thus, quite apart from doubts about the sponsor, a new global payment system must be evaluated for its technical stability, impact on monetary and financial stability (not least in developing countries) and openness to fraudsters, criminals and terrorists. Big questions also arise about concentrations of power, should the venture succeed.
Today’s plan is only for a payment system. The currency itself is, in the words of the Libra white paper, to be “fully backed by a reserve of real assets. A basket of bank deposits and short-term government securities will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value.” That value will, however, be vulnerable to foreign exchange fluctuations and financial shocks (including exchange controls). Its movements relative to currencies could disturb users. Regulators will have to assess the instabilities associated with such a system.
I cannot judge the technical stability of the proposed system. The claim that it is based on “blockchain” technology seems rather questionable. But only fanatical supporters of “permissionless” systems need worry about that. What matters most is that the system is robust, resistant to breaches and protects personal privacy, while being sufficiently transparent to regulators, judicial authorities and others with a legitimate interest in who uses it.
A crucial issue is how Libra would interact with traditional banks. It might deprive them of a large proportion of their customers, on the payments side. Instead, the Libra system might hold huge deposits in the banks, matched, on the other side of its balance sheets, by customers’ holdings of Libra.
Alternatively, as Mr Carney said: “As new payment providers and systems emerge, access to the [BoE’s] core infrastructure should change and it makes sense to consider whether they too can hold funds overnight on the bank’s balance sheet.” To the extent that central banks create these reserves (a decision they alone make), a system like Libra might circumvent the traditional bank-based payment systems altogether. The historic advantages of banks as informed lenders might disappear.
A far more significant possibility emerges: the Libra system, with its knowledge of customers, would become a lender itself, thereby usurping traditional banks on the asset side of their balance sheets. At worst, the world might have a Facebook-dominated mono-bank. The risks of that are huge: potential monetary and financial instability, concentrated economic and political power, lack of privacy and many other issues. A global currency, created by the lending of a global bank (since banks create money as a byproduct of their loans), in a currency (the Libra) not backed by any central bank, and with no dominant regulator, seems to create a nightmarish risk to stability.
There is indeed potential for greatly improved payment systems. But the emergence of a payment system on a network of Facebook’s scale would raise some huge questions. Should Libra ultimately develop into a true banking system, with the capacity to create its own fiat (man-made) currency, the questions would become yet more pressing. Even if lending by the Libra system is ruled out, regulators should not allow this plan to go ahead without fully understanding the implications. This would be true even if the lead sponsor were not Facebook. But it is. So beware.
Given our belief that precious metals prices will hold last weeks breakout to the upside and that Gold will rally in a parabolic price mode, we have attempted to identify how Silver would react given the price advance of Gold and the historic price ratio between Gold vs. Silver.
A number of pricing dynamics are taking place throughout the global stock markets and the historical measures of price relationship in advancing and declining markets could help us better understand the potential upside for Silver as the price of Gold continues to rally. Here we go with our “what if” results.
Gold Fibonacci Price Amplitude – Weekly Chart
You may remember when we were calling for Gold to rally from $1200 to just above $1300 earlier this year? We warned that once this move completed, a pause and pullback back below $1300 would set up a “Momentum Base” near April 21 that would become the launchpad for a much bigger move to the upside. Now that we’ve seen this setup complete almost exactly as we predicted months in advance, we are waiting for the price to breach the Fibonacci Price Amplitude Arc that is currently acting as resistance for Gold (see the chart below).
Once this level is broken, we believe Gold will rally to levels near or above $1560 and attempt to set up another “Momentum Base” somewhere between $1560 and $1640. This price level represents a key price zone where multiple price inflection points align and where a larger Fibonacci Price Amplitude Arc exists. It is very likely that price will run into resistance near this zone – although it may become very brief price resistance.
Let’s assume that Gold could target various upside price levels in the near future and that Gold may attempt to reach levels just below $2000 before the end of this year (2019). We’ve broken our research into price segments that will help us understand and breakdown Gold price advancement levels for future reference. We’ve selected : $1650, 1750, 1850 & 1950 price levels for our research.
The Gold/Silver ratio chart, below, highlights the incredible rotation we’ve recently witnessed as Silver exploded higher last week. Gold followed this move higher roughly 24 hours later.
The ratio between the price of Gold vs. Silver was at historical highs near 93 just a few days ago. Currently, it is at 88.1 – after Silver rallied to help close the price gap between the two metals. As you can also see from this chart, historical normal price levels are much closer to the 45 to 65 range.
What happens when this Gold/Silver ratio value becomes extended is that Gold holds more value than Silver. Silver is a precious metal that is often overlooked because Gold is the primary focus of metals traders. Yet, when a panic hits the global stock markets and Gold begins to move dramatically higher, Silver becomes an incredible opportunity as traders pile into Silver expecting it to close the price ratio gap quickly.
How big is this price disparity between Silver and Gold? How much more will Silver potentially rally if Gold hits certain key upside price targets? You should take a look at my article talking about the best metal to own for 2019 and beyond here. I compare gold, silver, platinum, and palladium. Let’s find out and explore some really incredible opportunities.
CONCLUDING THOUGHTS:
Using special reference points, the current ratio level, and our expected ratio level, we can determine that for every drop of 5.0 points in the ratio level, the price of Silver should increase by 6.5% to 7.5% to the price of Gold. Therefore, if Gold trades higher to $1500 and the ratio drops from 88 to 83, Silver should be trading at a level of $18.29.
We determined this ratio relationship process by identifying “anchor points” within the historic ratio chart, mapping out price levels that occur at these levels in advancing and declining metals markets, then mapping the corresponding ratio relationships so we could attempt to make these types of predictions.
Just wait to and see our PART II the shows what silver should do just reach a normal price ratio in tomorrows article!
I love to take on these types of challenges and to play “what if”. The idea that we may find some unknown or unseen opportunity for traders and investors is very exciting. We’ll share more of our research in Part II of this article and we’ll show you exactly what we expect to happen in the metals markets as the ratio continues to “revert”.In short, the opportunities for skilled technical traders over the next 16+ months is incredible. Huge price swings, incredible trends, big rotations and we could see nearly 300%+ profits to be had if you know what to trade and when. These types of opportunities are perfect for skilled technical traders like us and we want to help you prepare for and trade these opportunities.
This bear market for stocks and the new bull market for metals has been a long time coming, but finally, almost all the signs are showing that it’s about to start. As a technical analyst since 1997 having lost a fortune and making a fortune from bull and bear markets I have a good understanding of how to best attack the market during its various stages.
