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Friday, December 08, 2023

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Will Bitcoin be the demise of Gold?

As gold continues to wallow below the $1,300 per ounce mark, bitcoin made a fresh record high this week. Considering bitcoin and gold share some similar attributes, why is gold’s performance so lacklustre as bitcoin continues to march higher?

The question now is, is Bitcoin a better store of value than gold? To answer this we need to know what is driving the lacklustre performance in gold and if the factors weighing on the yellow metal will last.

  • Interest rates: expectations that the Fed will hike rates in December and continue with its rate-hiking cycle in 2018. Since gold yields nothing, and US assets are starting to yield more, this erodes gold’s attractiveness.
  • The Fed’s balance sheet: the Fed’s decision to shrink its balance sheet is also contributing to gold’s under-performance.
  • Stocks: this earnings season has seen a surge in firms who have said that they will increase their dividend. This also makes stocks more attractive than gold from a yield potential.
  • Demand: the World Gold Council reported that demand for gold slid to an 8-year low. Demand for gold fell to 9 tonnes in Q3, down 9% from Q3 2016.
  • Demand cont.: Sluggish demand is coming from significantly lower inflows into gold ETFs and a softer jewellery market in India, according to the World Gold Council.

But this doesn’t explain why Bitcoin, which shares some attributes with gold, continues to embark on its ferocious march higher. Here are some of the attributes shared by gold and bitcoin:

  • Both are decentralised, and are not under the control of a central bank or other authority.
  • Both are mined: one physically, one digitally.
  • Both yield nothing.
  • They are considered a store of value.

But, the crucial differences between gold and bitcoin include:

  • While demand for gold has slumped, demand for bitcoin is soaring, which is why its price has increased by a whopping 900% so far this year. This compared with a more moderate 14% gain for gold in the last 12 months.
  • Demand for gold ETFs has also slowed, one reason may be the prospect of more bitcoin-linked products that are about to come onto the market including bitcoin futures listed by the CME and bitcoin options listed on the CBOE. Some investors may be taking money out of gold-backed funds in anticipation of investing in bitcoin when these new products go live.
  • Gold has been around for millennia, bitcoin is the new kid on the block, which is inevitably adding to its lustre.

Overall, you could argue that the story behind bitcoin is stronger than it is for gold right now and that is the chief reason why gold is lagging behind Bitcoin. The potential for Bitcoin and crypto in general to overtake the fiat currency system in the coming years is also a powerful driver of demand, and is something that gold cannot compete with.

The case for gold:

We would caution against writing gold off completely for a few reasons:

  • Gold positioning, as measured by the CFTC, is still relatively strong even if it has backed off the highs of the year. There are currently 1.9mn long gold futures positions, which is above the 5-year average of 1.2mn contracts.
  • The technical picture also suggests that any further decline in gold could be capped by some key support levels including the 38.2% retracement of the Dec 2016 low to the September high. This level comes in at $1,268 and acted as solid support in early October and early November.
  • Gold is a tried and tested safe haven. During the financial crisis the price of gold surged 181%. Bitcoin is yet to be tested during a period of intense financial stress. Can the crypto currency only rally in a low volatility environment? If that is the case, then old-fashioned gold could see its fortunes rise once again, but we may have to wait for the elusive market sell-off before we can get excited about a potential resurgence for gold.

To conclude, although gold and bitcoin share many attributes, the bitcoin story has grabbed the trading and investing world’s attention like nothing else, hence the huge rise in its price this year. Gold cannot keep up with this and it is natural that we see some drift away from gold and into bitcoin in the coming months. In the short-term this may continue to weigh on the gold price, however, if we get a period of market stress then it could be time for the gold bugs to step up a gear as no one knows how bitcoin will react to a market panic.

Written by Kathleen Brooks, Research Director, at City Index

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