Bitcoin and gold seem to have an inverse relationship, recently. Cryptocurrencies peaked back in May, when Bitcoin fell over 50% from its highs of $60,000+ all the way down to $30,000. During this time, gold and silver moved up in the order of 10%-15%, massively outperforming all asset classes over the summer. But they have not really moved out of their summer range.
On Sunday, we saw gold break down below $1700/oz. on a massive $4 billion sell order, which knocked the precious metals space down on Monday as all stop-loss sell orders got activated at the same time. As soon as gold and silver broke below their key support levels, Bitcoin surged higher. It broke above its dull summer range of $30,000-$40,000, and was trading above $45,000 at time of writing -- closing above the key $41,500 level, which was needed to confirm the uptrend is still in place. Those that were calling for sub-$20,000 are licking their wounds.
Fundamentals aside, charts and technicals are one of the main drivers for this specific asset class. Gold had been basing around $1800 for the longest time. It needed to break above $1850 to confirm much higher levels to come, but the charts had not been supportive over the past few months, and it was unable to break above. The same applied to silver.
But can gold and silver be looked at in the opposite way to Bitcoin? Is there really an inverse correlation trade? Over the past year, given the surge higher in Bitcoin from the lows of $4000 during March 2020, a lot of retail traders have now started following the crypto mania -- chasing not only Bitcoin but various other smaller tokens as well. It seems to be an easy "bang for your buck," and everyone wants to become a millionaire fast -- especially as the Fed goes on pumping free money into the economy.
Taking a step back, Bitcoin, and gold to an extent, do present a solution to the same overriding theme: Fiat currency debasement across the board. As paper money is destroyed by central banks the world over, Gold used to be the best way to hedge that "inflation risk" as a store of value.
Bitcoin has started to garner more interest as it has another angle that makes its believers easier to understand: its true central bank independence -- as many people have lost faith in the government, it seems. Of course, Bitcoin has its specific fundamental drivers, like its halving cycle that will diminish the total number of Bitcoins in the system every four years, which implies higher prices if supply falls and demand rises.
Gold may seem like a boring asset compared to Bitcoin or other cryptocurrencies, but it cannot be forgotten. Most investors are so caught up in trying to only make a sizeable return on their investments that they forget to see how gold really is a store of value when it remains flat at a time when broader assets collapse.
At the end of the day, investing is not just about making huge returns, but it is also about preserving your capital and its purchasing power. We all know the big banks are short precious metals, and there are many games between the paper and the physical market to be played. The gold paper market has fallen about 5% and silver about 10%, without a move in their individual physical markets. Right now, precious metals are victim to where the U.S. bonds yields are headed. Gold never really caught up to its valuation with respect to real yields, so one wonders why it gets knocked down if it goes the other way.
Over the past few days, one of the main concerns for the market has been the improvement in U.S. payroll growth and higher inflationary numbers. We know the Fed is more concerned about the former than the latter, but soon -- if employment does return -- the Fed will have little justification to keep the free money liquidity train going. As we step closer to the Jackson Hole meeting, any commentary from Fed chair Jerome Powell will be extremely important in gauging whether the Fed has changed its mindset towards tapering -- or at least reducing its asset purchases, namely QE.
For now, as the market plays ping pong between its reflation vs. deflation view, and as it moves higher and lower with U.S. bond yields, all other asset classes and sectors seem to be taking their position accordingly.
The U.S. July Core CPI ex Food and Energy came in at 0.3% vs. 0.4%, slightly lower than expected, even though it is up 5.4% year-on-year. A slight air of relief has since been heard in the market, as it means the Fed has just bought itself a little bit more time before it "needs" to taper.
It is not a matter of owning Bitcoin or gold or cyclicals, as currently it is all one big macro trade. Keeping things simple, right now each asset is just a few multiple times levered to the other, reflecting the same macro theme. As always, sizing each asset is incredibly important based on its volatility -- that is key. But it would be naïve to say if one can totally replace the other.
