Safe-haven rivals move inversely to one another in a quarter mired by mixed inflation reports, Elon Musk FUD, and a suddenly hawkish Federal Reserve.
Gold is set to outperform Bitcoin (BTC) in the second quarter of 2021.
An ounce of gold has surged from $1,707.45 on April 1 to over $1,750 in the still-running June 30 session. That marked a roughly 3.9% jump over the quarter. Meanwhile, Bitcoin has plunged by more than 40% to below $35,000 after topping out near $65,000 in mid-April, all in the same period.
The inverse correlation between Bitcoin and gold markets surged specifically in April and May 2021. Analysts at JPMorgan noted in May that large institutional investors rotated their money out of the overvalued crypto markets to seek upside opportunities in gold.
Referring to the Bitcoin Futures data on the Chicago Mercantile Exchange (CME), JPMorgan analysts said that investors have been liquidating their positions from as back as October 2020. Meanwhile, capital inflows into gold-enabled exchange-traded funds have increased in correspondence to Bitcoin market outflows. An excerpt from the report reads:
“The bitcoin flow picture continues to deteriorate and is pointing to continued retrenchment by institutional investors. Over the past month, bitcoin futures markets experienced their steepest and more sustained liquidation since the bitcoin ascent started last October.”
The bank noted that institutional investors may have treated Bitcoin as an overbought asset, especially as the flagship cryptocurrency surged from $3,858 in March 2020 to just shy of $65,000 by April 2021—a 1,584% gain. Meanwhile, gold topped out at $2,075.82 per ounce in August 2020, after which it dropped to as low as $1,676.866 an ounce in March.
The rotational investment strategy from Bitcoin to gold also picked momentum after Elon Musk criticized the cryptocurrency for its carbon footprints, insomuch that he suspended accepting it as payment for his Tesla electric car range.
On May 19, right after Musk doubled down his attack on the Bitcoin market, stating that he might have Tesla unload its entire $1.5 billion BTC stash, Bitcoin crashed by roughly 30%. The bearish bias increased also after China announced a complete ban on cryptocurrency activities, including mining-related operations that contributed a large chunk of the Bitcoin network’s total computing power.
Bitcoin closed the May session at a 35.5% loss. On the other hand, gold benefited from the FUDs in the crypto market, rising 7.6% in the same month.
Investors picked gold over Bitcoin as a safer haven also as they feared higher inflation is around the corner. As a result, the precious metal surged 3.78% in April as consumer prices in the US rose at their best momentum in over a decade, to 4.2%. The next month—as stated above—saw gold continuing its rally alongside a similar upside tick in the consumer price index, which surged to 5%.
Core PCE, the Federal Reserve’s preferred metric to gauge inflation, jumped to at an annual rate of 3.4% in May, the highest in 29 years.
Jerome Powell, the Federal Reserve chairman, appeared adamant about the rising inflation as he called the price rises “transitory in nature.” He further stressed that the central bank would maintain its expansionary fiscal programs to protect the U.S. economy against the economic aftermath of the coronavirus pandemic.
Fed has been keeping interest rates near zero and has been purchasing $120 billion worth of government bonds and mortgage-backed securities every month since March 2020.
June appeared as the only month in the second quarter that saw Bitcoin and gold trending in tandem.
The assets traded flat in days approaching the Federal Open Market Committee’s two-day policy meeting in June’s second week. Fed officials announced that they might hike interest rates twice by the end of 2023, a year earlier than anticipated, to contain excessive inflation rates.
Both Bitcoin and gold fell in tandem after the Fed’s hawkish tone. Gold, in particular, looked at prospects of logging its worth monthly performance in June since 2016. It was down 7.42% at publishing time.
Meanwhile, Bitcoin had fallen by more than 8.5% in the same period.
What’s next for Bitcoin and gold?
A survey of leading economists conducted by Financial Times found that a majority of them expect the Fed to raise interest rates at least twice by the end of 2023, aligning accurately with the central bank officials’ dot plot.
Carsten Fritsch, an analyst at Commerzbank AG, recommended watching the US dollar to gauge gold’s strength in the coming sessions, noting that June’s major drag on the precious metal appeared because of a strengthening greenback.
The U.S. dollar index, a benchmark to measure the dollar’s strength against a basket of top fiat currencies, rose to a one-week high at 92.433 on Wednesday.
“Gold repeatedly failed to overcome the 100-day moving average in recent days, which was a bearish sign,” Fritsch told Bloomberg. “There is a risk now that so far, patient ETF investors jump on the bandwagon and sell their holdings. This would amplify the downward move.”
At the same time, Bitcoin bulls received similar warnings as the cryptocurrency grappled repeatedly with the risks of falling below $30,000, a psychological support level.
Jill Carlson, a venture partner at Slow Ventures, told CNBC that institutional outflows from the Bitcoin markets had picked momentum recently, adding that traders need to be “cautiously bullish” on the cryptocurrency.
Clem Chambers, the CEO of financial analysis portal ADFVN.com, predicted another leg down for Bitcoin, noting that breaking below $30,000 would put the cryptocurrency on the path toward $20,000.