Is There A Gold/Bitcoin Correlation?

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Includes: AAAU, AGQ, BAR, CEF, COIN, DBP, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GLD, GLDI, GLDM, GLDW, GLL, GLTR, IAU, IAUF, OUNZ, PALL, PHYS, PLTM, PPLT, PSLV, PTM, QGLDX, SGOL, SHNY, SIVR, SLV, SLVO, SPPP, UBG, UGL, UGLD, USLV, USV, ZSL
by: CME Group
Summary

On November 14, 2018, CME bitcoin futures broke through the important $6,000 support level and lost more than 40 percent of their value in the next 12 days.

On that same day, gold futures accelerated off their lows and began an explosive 9 percent rally higher.

Bitcoin's sentiment-shift most probably fueled and accelerated the opposing move in gold.

By Jim Iuorio

At a Glance

  • Among the two major alternative currencies, gold has emerged on the upside, at least temporarily.

On November 14, 2018, CME bitcoin futures broke through the important $6,000 support level and lost more than 40 percent of their value in the next 12 days. On that same day, gold futures accelerated off their lows and began an explosive 9 percent rally higher.

Macro traders and analysts love dependable correlations between asset classes. The desire to spot a corollary trend is so great that maybe, just occasionally, some of us project a relationship before we have the real data to back it up. So gold and bitcoin started significant moves at the same time in opposing directions. Is that a big deal? Before we answer that question we have to figure out what bitcoin and gold actually are. Or, more appropriately, WHY they are.

Analog and Digital Currency Protection

Most of the bitcoin/crypto currency fanatics I know argue that bitcoin is an alternative currency that's free of the central bank manipulation of standard fiat currencies. When all three major central banks were engaging in wildly dovish policy initiatives after the Great Recession a need seemed to arise for protection against currency devaluation. You might ask 'isn't that what gold is supposed to be?'

Historically gold has been the last resort hedge against the fear of overzealous monetary policy initiatives. Bitcoin, it appears, is the same exact thing but for the digital age. Gold bugs and bitcoin fanatics can argue about which assets will do better in what levels of currency Armageddon, but several things should be agreed upon. Both assets should do better in a weak dollar, low interest rate environment.

However, as the dollar goes higher, and interest rates rise, the cost of holding non-interest-baring assets goes up and the price of both gold and bitcoin should go down. That's exactly what we saw for the better part of the year that preceded November 14, 2018.

Heading Opposite Directions

What happened on that day has several moving parts that need to be considered together in solving the riddle. First, the dollar appeared to lose steam in its climb and began a pullback. Secondly, interest rate expectations pivoted as the Fed opened the door to a more dovish stance based on a global economic slowdown potentially arriving on our shores. Those two things should be viewed together as they are closely related.

Gold's move higher was predictable as it usually moves higher with a decline in the dollar and interest rates. Bitcoin, however, was the stark outlier.

Instead of moving alongside gold in a positive correlation, it was pummeled. I believe the answer to why is relatively simple: The market still views bitcoin as being in the infant stages of price discovery. The scars of the move from $20,000 to $6,000 are nowhere close to being healed.

The initial move below $6,000 flipped sentiment so abruptly that the rush to the exits far outweighed the improving fundamental backstory. The move underscored a deep fear that bitcoin may not be needed on the safe haven asset list. Now here comes the punch line.

Bitcoin's sentiment-shift most probably fueled and accelerated the opposing move in gold. In other words, gold's move reflected a victory in the battle of alternative currencies. The inverse relationship in the two assets still exists today and will continue until bitcoin can prove, over time, that price stability is possible. The question of whether or not the war is over will exist for a while but for now gold is clearly in charge.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.