Bitcoin And Gold Prices May Converge Again In 2023-24

Summary

• The cryptocurrency bubble has burst on tightening liquidity conditions and rising interest rates.
• Bitcoin appears destined to fall closer to $3,000 in coming years, if it follows the traditional bust format of selling like previous manias lacking intrinsic value.
• Gold is uniquely undervalued in 2022, with a list of reasons to own it multiplying this year.
• A bullish forecast of US$2,500+ an ounce in 2023-24 is backed by historical arguments for a severe recession and another round of dollar devaluation.
• In the end, I expect both Bitcoin and gold prices to converge in the $3,000 to $4,000 area sooner than many think possible.

brightstars

I have only written one article on Seeking Alpha about cryptocurrencies, suggesting in August 2021 here investors should avoid Bitcoin (BTC-USD), when its price was around $45,000. My story explained how Bitcoin was in a bubble that would eventually burst. I have never owned cryptos, because I have no clue how to value them without concrete, verifiable math. Bitcoin could be worth $100 or $1,000 or $100,000. Who knows, it’s all guesswork and hoping a “greater fool” will show up willing to pay more. Just like every other tulip craze, at some point you reach maximum ownership and speculators become net sellers, instead of buyers over time. Well, it appears we reached that balance in 2021, with a peak price above $65,000 achieved.

Now price is around $16,000, while crypto exchanges are blowing up and exposing serious accounting and fiduciary issues underneath the surface of this go-go asset backed only by owner over-enthusiasm and excessive liquidity in the global financial system. An explanation of last week’s FTX (FTT-USD) saga and bankruptcy is linked here. Unfortunately, the U.S. Federal Reserve central bank has decided to mop up liquidity by raising interest rates and selling bonds on its balance sheet. This action has poked a whole in the higher “forever” hopes of crypto lovers. What if a lower forever trend is the new reality?

Conversely, gold has been successfully used and valued as base money for thousands of years on every part of the globe. Paper currencies have always been tied to it, whether done officially with a gold standard or not. Trading precious metals since 1986 and engaging in all kinds of historical research, it remains fascinating to me that gold prices are clearly tethered to fiat money printing and sovereign debt issuance in every nation on earth, even in 2022. I have written many articles explaining how gold and silver prices are a function of paper monetary levels, alongside the relative pricing of alternative assets and commodities. One such effort in August on silver’s current undervaluation is linked here.

My point is gold has been left for dead by Wall Street as “relic of the past” many times over my 36 years of trading experience. But, it has always come back into vogue when recession, economic uncertainty, and war show up. The exact rush of buying occurs when investors decide to turn truly fearful of the future. 2023 may provide another setup where investors, traders, institutions, and governments of all types decide they want to own it again.

One bullish piece of data in November: foreign central banks have added to their gold positions in 2022 at the highest intake rate in 55 years! According to an OilPrice.com article:

Central banks globally have been accumulating gold reserves at a furious pace last seen 55 years ago when the U.S. dollar was still backed by gold. According to the World Gold Council (WGC), central banks bought a record 399 tonnes of gold worth around $20 billion in the third quarter of 2022, with global demand for the precious metal back to pre-pandemic levels. Retail demand by jewelers and buyers of gold bars and coins was also strong, the WGC said in its latest quarterly report. WGC says that the world's gold demand amounted to 1,181 tonnes in the September quarter, good for 28% Y/Y growth.

So, here’s my prediction: as cryptocurrencies continue to deflate in 2023, and the reasons to buy gold multiply in a deep global recession (forecast by October’s Treasury yield-curve inversion here), gold priced in U.S. dollars per ounce will eventually converge with Bitcoin. Then, gold will surpass Bitcoin in price and reclaim its position as the leading base money to value everything else in our fractional reserve banking world. It could happen quickly, or it may take several years, but I am confident this convergence will be reality soon enough.

My Specific Forecast

What I am visualizing next year is a giant jump in gold prices above US$2,500 per ounce, with Bitcoin sliding well under $10,000. It is entirely logical investors and traders should prepare for both assets to converge in price between $3,000 and $4,000 at the end of 2023 or sometime in 2024.

Below is a log-scale chart of pricing over the past decade for both assets, one physical, simple, understandable and accepted for thousands of years, the other a new-age computer code asset that has not been severely tested in a prolonged recession and liquidity crisis. The last time the two decentralized money ideas converged in price was early 2017. I have marked with a red box my “convergence” area to watch in 2023 or 2024.

YCharts - Gold vs. Bitcoin, Price Changes with Author Convergence Point Estimate, 10 Years

Since November 2021, the wicked -75% collapse in Bitcoin has done wonders to rapidly bring prices for both into closer proximity. Another -75% Bitcoin decline matched against a +70% to +120% increase in gold prices would get us to equal pricing in the $3,000 to $4,000 range.

YCharts - Gold vs. Bitcoin, Percentage Price Changes, 1 Year

On a 3-year chart, we can review how Bitcoin’s monster advance into last year’s peak is deflating at amazing speed. One more concentrated sell wave will put Bitcoin (and many other cryptocurrencies) back to 2019 pre-COVID levels.

YCharts - Gold vs. Bitcoin, Percentage Price Changes, 3 Years

How To Play The Convergence

Avoiding or selling your Bitcoin now is the easiest way to sidestep the next wave of liquidation in cryptos. Pretty basic rationale.

To prepare for a sizable gold advance, you can directly buy bullion and coins well above the spot pricing of COMEX futures or the official London fix. Honestly, something of a shortage globally in physical metals has existed since the start of the COVID-19 pandemic.

However, the best option for brokerage portfolios remains ETFs tied to bullion, if you are looking for easy low-cost ways to gain ownership and exposure. My two favorites are also the two largest in this space, the SPDR Gold Shares ETF (NYSEARCA:GLD) and iShares Gold Trust ETF (IAU). I own these names and others personally.

On the 1-year graphs below you can review decent trends in the Accumulation/Distribution Line and On Balance Volume readings for both gold bullion ETFs. Also, I have drawn a comparison line vs. Bitcoin pricing. The two gold choices have “outperformed” Bitcoin by +267% over the last 12 months!

StockCharts.com - GLD, Daily Changes in Price/Volume, Since November 2021

StockCharts.com - IAU, Daily Changes in Price/Volume, Since November 2021

Final Thoughts

Could my forecast prove wrong? To a degree, it could. It’s possible neither Bitcoin nor gold declines/rises much in 2023, if a recession fails to materialize. In this case, the convergence in price may not take place for another two or three years. However, booms in things/assets with little underlying value or utility have inevitably busted all the way back closer to zero for price (after you turn your computer off, cryptos are degraded to an idea in your head). That’s the clear history of fads and manias throughout all of human time, regarding rampant speculation in beanie babies, or tulips, or dotcom stocks with no earnings/sales, or today's cryptocurrency experiments backed only by fantastical computer code and blind faith.

I would rather go with a proven winner through history. Gold has been accepted as a form of wealth and currency long before Jesus or Muhammad or Buddha. You can use gold in jewelry. It's important for electronics and industrial applications. So, if track records and philosophical logic are important in your investment decision making, gold easily trounces Bitcoin for long-term holding value and worth.

With a world awash in record debts and fiat money creations, gold should again stand out as a beacon of investment honesty. Gold/silver bullion are some of my biggest financial holdings as hedges against dollar devaluations in a severe recession scenario. Bankers and government officials seem OK with inflation creeping higher. What if stagflation morphs into hyperinflation? How do you prepare?

I firmly believe $5,000 or even $10,000 gold quotes are a certainty over time. The only question is when will these numbers play out. Remember, gold traded at $50 an ounce in 1970 and $275 in 2001. $1759 gold today is just a temporary steppingstone to yet higher numbers in the not-too-distant future. My argument is to count on gold for future wealth hedging against dollar devaluations, not volatile/controversial Bitcoin or related crypto inventions. Food for thought anyway.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GLD, IAU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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