Bitcoin's recent big gains have sparked talk that it will replace gold as a safe haven, especially with the recent decline in the precious metal and the incredible parabolic run in bitcoin. But whether a poorly understood electronic exchange medium that's less than a decade old can replace humanity's oldest store of value is still a question up for debate.
In his "Off the Charts" segment of Mad Money Tuesday night, Jim Cramer checked in with Carley Garner, co-founder of DeCarley Trading and the author of Higher Probability Commodity Trading.
Garner told Cramer that bitcoin was never intended to be an investment vehicle, even if that's what it's become. What's more, bitcoin's not backed by anything tangible. If some global calamity struck and knocked out power, holders wouldn't even be able to access the digital currency. And of course people lose their cryptocurrency investments to hackers, or simply because they forgot their password. Overall, Garner believes bitcoin's astronomical value is the result of perception, not reality.
Of course, many argue that gold only has value because of perception, too. Even if you take away gold's symbolic value, however, it can still be used for jewelry, electronics and dental fillings. Garner adds that the gold market is extremely deep with millions of investors owning everything from bullion and coins to jewelry.
The worldwide gold market is worth about $2.4 trillion. That's trillion, with a T. The total market for cryptocurrencies is about $600 billion, and even with bitcoin's remarkable run, it accounts for only about half of that. In addition there's a widespread belief that huge swathes of the bitcoin market are dominated by maybe only a thousand players, something that can really skew the action.
Garner remains skeptical that gold's recent weakness stems from bitcoin's strength
According to Garner, when gold pulled back below $1,250 an ounce earlier this month, it was no different than the multiple other pullbacks we've seen this year. In fact, that was the fourth time gold dropped below $1,250 in 2017 and it's already bounced back above that level. Nobody blamed it on bitcoin the last three times.
Garner thinks the precious metal could be poised to go higher here, pointing to a seasonal chart of gold that averages the action over the past 15 years. Gold usually gets hit with a decline in early December, which then gets met by buying, and typically leads to a run that lasts until early March.
A weekly chart of gold shows the commodity futures trading commission's commitments of traders report. Garner loves this data because it tells you what large speculators -- meaning money managers -- small speculators, and commercial hedgers are doing with their gold futures. Garner's noticed that when the net long position of large gold speculators falls below 100,000 contracts, the precious metal has a tendency to find a bottom. At the moment, it's right at 100,000, which means we could have a little more downside or maybe gold already bottomed at its lows last week.
Garner also likes to look at a weekly chart of the dollar index, which measures the U.S. dollar against a basket of currencies. Gold is denominated in greenbacks, so when the dollar goes down, gold goes up. Garner thinks the dollar index is headed to 90 -- the last time it was there, gold was trading near $1,350, up nearly $90 from where it's currently trading.
As for the weekly chart of gold, the decade-long period where the precious metal could do no wrong ended in 2013 when it collapsed. Gold has struggled to make a comeback ever since, caught between $1,000 and $1,400. Garner's noticed that whenever the gold bulls are loudest, the gold market tends to get hit with selling; whenever the bears seem ascendant, buyers step in and we get a rebound.
So the more we hear that bitcoin is bearish for gold, the more people say that the shiny stuff as being replaced as a repository for the world's wealth, the more confident Garner feels that the precious metal could have some upside from these levels.
Also, the slow stochastic oscillator at the bottom of the chart measures when an asset has gotten too overbought or too oversold. Of the past 10 occasions when this oscillator has shown oversold readings -- meaning gold's due for a bounce -- nine of them saw a nice rally.
Garner also notes that the precious metal has two floors of support, one at $1,235 and another at $1,200. She expects those levels to hold and she sees gold running up to $1,350 before it hits a ceiling of resistance. Any kind of positive fundamental news could push it to $1,420.
In the end, gold has experienced multiple slumps in recent years, and every time it's managed to bounce back. Garner thinks the bitcoin-related worries will play out the same way.
Over on Real Money, Cramer says breakouts are the new normal for this market. Get more on Cramer's insights with a free trial subscription to Real Money.
Cramer and the AAP team are using this weakness to scale further into Microsoft (MSFT) . Find out what they're telling their investment club members and get in on the conversation with a free trial subscription to Action Alerts PLUS.
Search Jim Cramer's "Mad Money" trading recommendations using our exclusive "Mad Money" Stock Screener.
To read a full recap of this episode of "Mad Money," click here.
To watch replays of Cramer's video segments, visit the Mad Money page on CNBC.
To sign up for Jim Cramer's free Booyah! newsletter with all of his latest articles and videos please click here.
More of What's Trending on TheStreet: