Gold is back this month with a vengeance, just as the crypto rally falls apart, reigniting the debate on Wall Street about the link between the two putative hedging assets.
Gold funds have posted the two largest inflow weeks since October and prices are approaching $ 1,900 an ounce. By contrast, bitcoin has plunged nearly 40% from a high of $ 63,000 and funds are posting exits.
Yes, the weakening of the dollar and falling inflation-adjusted yields are the main reasons for the resurgence of gold. For its part, the volatility generated by Elon Musk has dampened some of the speculative euphoria of bitcoin, while also undermining its ambition to attract the institutional public.
Yet all of this fascinates a market cohort that points to the parallels between digital and real gold. Both are seen as hedges against inflation, short-supply commodities, and capture the cultural divide between tech-obsessed young traders and boomers of the boom era.
Meanwhile, companies like JPMorgan and ByteTree Asset Management say that the recent rise in gold appears to have been, at least in part, at the expense of bitcoin as investors rotate between the two.
“There is still a lot of confusion between bitcoin and gold,” Charlie Morris, founder of ByteTree, wrote in a note. “They coexist, and both thrive in an inflationary environment.”
In a report on changes in gold and bitcoin trends, Morris suggested that cash flows are having an unusually large impact on the gold price momentum, and conversely, bitcoin outflows are depressing the assets. prices.
The past may be a prologue: Earlier this year, bitcoin funds attracted institutional money while money managers extolled the argument that digital currencies take the place of gold in a portfolio. With economic growth in full swing, more than $ 20 billion came out of gold-backed exchange-traded funds (ETFs) in the six months through April.
For some strategists, the gold market is a starting point for guessing their price forecast for bitcoin. In a world where investors allocate gold and bitcoin equally to their portfolios and the two assets converge in volatility, it would imply a valuation of bitcoin of $ 140,000, as previously estimated by JPMorgan.
“It goes without saying that such convergence or equalization of volatilities or allocations is unlikely in the near future,” wrote the strategists led by Nikolaos Panigirtzoglou.
Since the advance of the COVID-19 vaccine sparked an economic rebound in November, exchange-traded funds that track gold have sold nearly 12 million troy ounces through early May, worth around $ 22.5 billion. at the current price.
Investors withdrew nearly $ 14 billion from the SPDR Gold Shares ETF during the period, helping reduce total assets in the world’s largest gold ETF by 29%. About $ 1.6 billion has reentered the fund to make May the best month since July.
On a day-to-day basis, the direct link between gold and bitcoin is difficult to pin down, suggesting that the connection has more to do with market psychology than actual money flows. The threat of price pressures and a weaker dollar are good reasons for the metal’s current rally.
And while bitcoin price predictions have been tempered by the selloff, the excitement hasn’t waned. Bloomberg Intelligence strategist Mike McGlone, who has a $ 100,000 price target for bitcoin, says there is still a chance that cryptocurrencies will become a digital reserve asset and that makes it worth the risk.
“Gold may be losing its importance, so it may be simply prudent to diversify,” wrote McGlone. “The human nature of recognizing a new asset class is what we see as prime support for bitcoin.”
