Bitcoin investors have had a rough time lately. The digital currency dropped more than 35% in five days, and more than 50% from its all-time high two weeks ago.
Precious metals investors (on the long side of the market) suffered a similar fate, though the drop in gold and silver was modest. iShares Silver Trust (NYSE:SLV) was down near 1.6% in the last five days, while SPDR Gold Shares (NYSE:GLD) was down 1.7% near an 18-month low.
Major Precious Metals ETF Performance On Friday
|ETF||5-day Performance (%)|
|SPDR Gold Shares||-1.70|
|iShares Silver Trust||-1.60|
Investors concerned about the effects of aggressive monetary easing by the Federal Reserve and other central banks have been amassing Bitcoin and precious metals— seeing the two investment vehicles as alternatives to traditional currencies, which are undermined by monetary easing.
So far, however, these policies have blown all sorts of bubbles — like the Bitcoins and the precious metals that went bust — as investor sentiment shifted from greed to fear.
That's certainly old news. The new question is which bubble is next next to burst?
It is hard to say, as liquidity around the world continues to provide cheap money to risk-takers, especially after the launching of Japan's ambitious plan to reflate its economy. Nevertheless, investors should keep an eye on the US Treasury market, as the Fed is getting ready to taper, and high dividend stocks. Rising Treasury yields or a big earnings disappointment could ignite a massive exit across the board, bursting the dividend trade bubble.
This was the case with shipping companies a few years ago. Frontline's stock, for instance, descended from $70 down to $ 2.05, once the company could no longer produce the earnings to support its hefty dividend.
For the rest of the equity markets, the bubble may get bigger before it goes bust, as we wrote in a previous piece, due to the fear of missing out on potential gains. That's an "emotional button" which is usually turned on in bull markets, as investors score a string of quick gains — turning the bull market into a bubble.
While a quick gain evokes excitement, a string of quick gains turns excitement into euphoria, which feeds into greed. That can become contagious with human interactions, as investors race to copy each others' behavior.
That may prove to be the case again, in early 2014.