Summary: Gold suffered a rough month in November, while Bitcoin soared toward new highs. This decoupling undermined the improving correlation between the two assets – each benefitting from the weakening US Dollar. Bitcoin has been buoyed by groundbreaking headlines on the institutional side, while gold funds have begun suffering some major outflows. Some have even speculated money is flowing out of gold and right into BTC, perhaps lending credence to the crypto’s “digital gold” nickname.
Related ETFs: Grayscale Bitcoin Trust (GBTC), SPDR Gold Shares (GLD), VanEck Vectors Gold Miners ETF (GDX)
Dollar Weakness Could Stem BTC-Gold Decoupling
As stocks bounced higher in November, Bitcoin (BTC) and Gold begun to decouple. That was a departure from the overall trend of gold becoming more correlated with BTC over the last decade.
Last month, AMBCrypto wrote that, at the end of Bitcoin’s 1st halving in 2012, it was 2% and around 11% during the end of 2nd halving in 2016. After the 3rd cycle in 2020, the BTC-Gold correlation had jumped to 43%.
The price of BTC in dollar terms crossed $19,000 for the first time since 2017 last week while the gold languished. Despite the down month, gold came into December with a bang, bouncing off close to a five-month low on Tuesday, to log the sharpest one-day gain in more than three weeks. The yellow metal closed more than 2% higher, rising back above the $1800 level.
BTC has often been hailed as “digital gold” by its growing pool of adherents, but we’ve yet to see that assessment substantiated by empirical performance data.
What we do know for sure is that both Bitcoin and Gold are valuable as hedges against inflation and have certainly responded positively to huge monetary stimulus measures that continue to weaken the Dollar. The USD Index (DXY) is down more than -10% since mid-March and headed back toward a multi-year low yesterday on news of a bipartisan-backed COVID relief package in the US Senate worth $908 billion.
MRP has repeatedly highlighted the rapidly rising sea of cash sloshing around in the economy right now. Since the end of February, the M1 supply of money, which includes physical currency, demand deposits, travelers’ checks, other checkable deposits, and negotiable order of withdrawal (NOW) accounts, has increased by $1.8 trillion, or about 45%. This rapid debasement of the currency is expected to continue through at least the rest of the year with the Fed currently purchasing $80 billion worth of US Treasuries per month.
Additionally, the Fed has indicated interest rates are likely to remain close to zero until 2023 and, with more fiscal and monetary stimulus measures undoubtedly on the way to combat the economic effects of COVID-19, investors can expect more inflation to depress US real rates (short-term interest rates – inflation).
The most obvious determinant of where the money goes is short-term interest rates and their differences from other currency regimes. Other things equal, it makes more sense to keep cash in a currency that has a higher rate of interest. Still, there is another key consideration: inflation-adjusted or “real rates”. However enticing a short-term yield may be, it doesn’t buy much if the purchasing power of the currency diminishes by more than the interest earned; or it can buy even more if purchasing power improves.
With US real rates now stuck in negative territory for the foreseeable future, it’s not surprising that gold and BTC are each becoming more preferable to the Greenback…
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