Gold Undergoes $2tn Market Wipe-off against Booming Bitcoin; Coincident?

The last four months saw gold trimming its market valuation by $4 trillion. Conversely, Bitcoin added about $180 billion within the same period.

Both gold and bitcoin were the benefactors of aggressive monetary easing policies launched by the Federal Reserve. The precious metal reached its record high of $2,075.82 an ounce on August 7, 2020. But it failed to hold the top. A profit-selling wave arrived and corrected the XAU/USD price by as much as 14.97 percent.

On the other hand, Bitcoin experienced its share of local sell-offs but continued rallying upward nonetheless. On December 1, 2020, the flagship cryptocurrency established a new record high at $19,873 a token (data from Coinbase). The move uphill served as a reminder of earlier studies that showed a lagging positive correlation between gold and Bitcoin.

So does that mean Bitcoin, too, would meet the same fate as gold did after setting its all-time high? The opinions differ.

The Store of Value Upgrade

According to JP Morgan Chase & Co, family offices are actively selling their gold-based exchange-traded funds to seek exposure in cryptocurrencies. So far, they have sold 93 tons of precious metal worth around $5 billion. At the same time, capital inflow into Grayscale Bitcoin Trust has surged twofold.

Bitcoin’s shot to a record just as billions of institutional dollars have fled gold, sparking an intense debate on Wall Street.https://t.co/3E0rfyfO8j by @Edspencive & @helloiamyvonne pic.twitter.com/bnqBRLaHap

— Tracy Alloway (@tracyalloway) December 1, 2020

The study makes gold and Bitcoin looks like competing assets. It means investors would more likely upgrade their store of value from physical to digital, thus taking away a good portion of capital from the so-called outdated markets. Dan Tapeiro, a macro investor with exposure to both gold and Bitcoin, said it is possible.

“$2 trillion dollars of gold value wiped away in the past 4 months,” he explained. “No, it didn’t all go into Bitcoin which has added $180 billion in the same period but a 10% capture rate would still be impressive.”

Charlie Morris, chief investment officer at ByteTree Asset Management, also thinks money has moved from gold markets to Bitcoin’s. Nevertheless, he also reminded that platinum — a commodity rival — has also fared upwards in recent sessions, providing more than one alternative to the yellow metal.

“The gold market was pretty hot this summer, so it’s not surprising to see the price slip back a bit heading into year-end,” Mr. Morris explained. “Some money has pulled out of gold, maybe it has gone into platinum because of the green movement, and obviously some of it has gone into bitcoin, cause all this excitement.”

Bitcoin Correction Woes

A week ago, Bitcoinist published an article titled, “Bitcoin’s Lagging Correlation with Gold could Push Price to $25K.” It discussed how the cryptocurrency is mirroring gold traders but with a delay.

Meanwhile, the BTC/USD exchange rate also took cues from certain technical fractals that showed it would test $25,000 before pulling back lower as gold did after the August high.

Bitcoin-Gold correlation since September 2018 (as of last week). Source: BTCUSD on TradingView

As the chart above shows, Bitcoin’s correlation with gold shows it would extend its uptrend towards the 1.138 Fibonacci level. Now, all the analysts mentioned above think gold could rebound. It means Bitcoin could do the same despite undergoing a massive downside correction.

“Bitcoin and gold are both on the right side of the inflation trade,” Mr. Morris said. “They are both assets that will protect investors from the massive fiat currency debasement trade that is coming.”