Gold Surges to Record High While Bitcoin Struggles Amid Diverging Market Trends

Gold and Bitcoin: Divergence in Performance

Gold has surged to a new record high, reaching an impressive $2,564 per ounce on Friday, marking a remarkable 10% increase for the quarter. In stark contrast, Bitcoin (BTC), often referred to as digital gold, has struggled and is currently trading just under $58,000, reflecting a 7% decline over the same period, as per data from CoinDesk. The performance of gold stands out even more when considering that the S&P 500, Wall Street’s benchmark index, has managed only a modest 2% rise this quarter.

Recently, Bitcoin has shown a tendency to move in alignment with technology stocks, largely due to prevailing fears of a potential U.S. economic recession and the looming threat of significant unwinding of “risk-on yen carry trades.” Many analysts believe that the current divergence between BTC and gold can be attributed to unique, idiosyncratic factors. The ongoing rally in gold suggests that favorable macroeconomic conditions may soon be on the horizon for cryptocurrencies as well.

According to Charlie Morris, chief investment officer and founder of ByteTree, gold’s recent surge is closely tied to increased accumulation by central banks—a privilege that Bitcoin has yet to experience. Morris suggests that this accumulation indicates a forthcoming easing of monetary policy. “The appeal of holding government bonds in reserves is diminishing, leading to a significant uptick in gold accumulation by central banks. Historically, gold was priced off U.S. Treasury inflation-protected securities, but it is now being influenced by global economic factors, including structural government deficits,” he explained in an interview with CoinDesk.

Morris further noted, “The strength we are witnessing in gold prices reflects an increasing current and future supply of fiat money, among other economic indicators. Bitcoin is likely to experience a rally either when the economy strengthens or when stimulus measures are announced.” The year-on-year change in the combined fiat money supply growth across the U.S., Eurozone, U.K., and Japan turned positive in August, and this growth may continue as central banks initiate renewed liquidity easing measures. Just recently, the European Central Bank announced a cut in interest rates, and the Federal Reserve is anticipated to follow suit next week, signaling the beginning of a new easing cycle. This could soon lead U.S. investors to hear the familiar call of stimulus.

André Dragosch, head of research at ETC Group, opined that the current rally in gold likely foreshadows a significant decline in inflation-adjusted U.S. government bond yields. Typically, a drop in what are known as real yields prompts investors to shift their funds into riskier assets like Bitcoin and technology stocks, a trend first observed in 2020. “Gold prices have completely decoupled from U.S. real yields. This suggests two possibilities: either gold is overpriced or it is already forecasting a substantial decline in U.S. real yields,” Dragosch stated.

He continued, “A significant decrease in U.S. real yields would equate to a major easing of monetary policy, which has yet to be broadly reflected in the financial markets, except for gold. This scenario suggests that Bitcoin and other assets may soon follow gold’s upward trajectory.” The U.S. 10-year real yield has already retreated to 1.61%, its lowest level in over a year, down from a peak of 2.52% in October, according to data from TradingView.

Gold-Bitcoin Demand Divergence

Data from the World Gold Council reveals that central banks acquired 37 tonnes of gold in July, doubling their net purchases from the previous month. This marks the highest monthly acquisition since January, when central banks purchased 45 tonnes. In the entirety of 2022, central banks collectively purchased 1,037 tonnes of gold, which stands as the second-highest annual total on record, following a historic 1,082 tonnes in 2021.

In contrast, the Bitcoin market has faced significant pressure, with billions of dollars’ worth of supply entering the market since June due to liquidations by Germany’s Saxony state, reimbursements to Mt. Gox creditors, and sales by the U.S. government. Additionally, the demand for the 11 U.S.-listed spot exchange-traded funds has weakened in recent months, leading to a net outflow of approximately $1 billion since late August, as detailed by Farside Investors.

The outflows and increased supply have contributed to Bitcoin’s lackluster performance, according to the LondonCryptoClub newsletter service. “Gold is anticipating lower real rates, rising liquidity, and a weaker dollar, much like Bitcoin. However, the difference in supply and demand dynamics is key. Gold has seen substantial demand from central banks, with little negative supply, while Bitcoin has had to absorb a considerable amount of supply in recent months due to distributions from the German and U.S. governments, as well as Mt. Gox reimbursements,” the founders of LondonCryptoClub commented.

“In the short term, gold’s outperformance could serve as a leading indicator of where Bitcoin may be headed,” they added. However, not all participants in the crypto market view gold’s rally as a positive sign.

Alex Kruger, a partner at the digital assets and macro advisory firm Asgard Markets, cautioned against over-analyzing the implications of gold’s rally for Bitcoin. “It’s irrelevant. Bitcoin does not trade in sync with gold. When you scrutinize something too closely, you risk seeing what you want to see,” Kruger remarked in a Telegram chat, especially as some traders recall how gold reached record highs in 2020 before Bitcoin followed suit.

Investors should remain vigilant for a potential resurgence of growth fears in risk assets similar to those observed in August, which saw Bitcoin plummet to $50,000. A prospective 50 basis point rate cut by the Fed next week could serve as a catalyst for such a scenario. “Bitcoin is viewed as a risk-on asset, while gold is considered risk-off. Gold thrives in a cooling economy with falling rates, whereas Bitcoin flourishes in an overheating economy,” Morris concluded.