After both breakthroughs on Monday, why did the price of gold plummet and Bitcoin continue to rise?

wallstreetcn ·  12/05/2023 10:35

It's actually a victory for Bitcoin as a risky asset.

As expectations of the Fed's interest rate cut heat up, Bitcoin and gold, which had previously been under pressure, seem to have finally ushered in spring.

Bitcoin rose above $40,000 intraday on Monday for the first time since May 2022. It continued to rise during the day. At the close of the day, the trading price exceeded 46,000 US dollars, erasing all the losses caused by the collapse of the stablecoin TerraUSD last year. Currently, Bitcoin's market capitalization has surpassed Buffett's Berkshire Hathaway.

At the same time, the price of gold has also reached a new all-time high, but its gains do not seem to be as strong as Bitcoin. Spot gold and gold futures both hovered around $2,150 in the Asian market and then turned down after hitting a record high in early trading. Overnight, the decline in US stocks in early trading both widened to more than 2%. Moreover, in terms of inflation-adjusted prices, the price of gold has yet to break through the 1980 high.

On Tuesday, spot gold prices rebounded slightly. Currently, they are only hovering around $2,035, down $115 from Monday's high.

The price of gold fell after breaking through, and behind the continued rise of Bitcoin is actually the victory of Bitcoin as a risky asset.

Risky assets vs. safe-haven assets

David Tawil, president and co-founder of digital asset fund ProChain Capital, said Bitcoin's rise was mainly driven by optimism that the US Securities and Exchange Commission (SEC) may soon approve ETFs that invest directly in cryptocurrencies, rather than macroeconomic factors.

Analysts believe that since Bitcoin is a risky asset rather than a safe haven asset similar to gold, expectations that the Fed will cut interest rates will usually increase investors' interest in risky assets.

Investors currently hold record levels of cash, of which money market funds amount to $5.7 trillion, according to the Investment Company Institute (Investment Company Institute). They are eager to make new investments, and this sentiment has helped risky assets like Bitcoin rise.

Tawil believes that it may just be a coincidence that Bitcoin and gold break through the high at the same time; the cryptocurrency will continue to rise at the end of the year and reach a high of $47,000 when the Bitcoin ETF is approved.

Tickmill Group analyst James Harte pointed out that for gold, the US non-farm payroll report released on Friday is very important.

Harte pointed out that if the report is weaker than expected, it may put further pressure on the US dollar and push the price of gold to continue to rise; conversely, the price of gold may not perform well.

The Fed's interest rate cut expectations, driving both gold and Bitcoin to soar

However, it is undeniable that the expectation that the Fed will cut interest rates is a favorable factor for both gold and Bitcoin.

Mark Connors, director of research at digital asset management company 3iQ, said that since people are optimistic that the Fed has raised interest rates and may begin cutting interest rates as early as March next year, both types of assets have risen.

According to the CME FedWatch tool, the probability that federal funds futures traders expect the Fed to cut key interest rates by 25 basis points at the March meeting is more than 50%, up from 21.5% a week ago.

According to FactSet data, 10-year US Treasury yields have declined sharply in the past month, down 39 basis points.

Amberdata derivatives director Greg Magadini said that the decline in US bond yields is a favorable factor for gold and Bitcoin. Since neither gold nor bitcoin accrue interest, high treasury yields would reduce the appeal of such assets.

Magadini pointed out that the gold and Bitcoin markets are often synchronized this year, for example, after the regional banking crisis in the US in March and after the outbreak of the Arab-Israeli conflict in October.

Gold or Bitcoin, who can go further?

In fact, there are already differences among analysts about the sustainability of the trend of gold and bitcoin.

Euro Pacific Asset Management's chief market strategist and well-known gold bully Peter Schiff posted on social media X (former Twitter) saying:

“The price of gold fell back below $2,100, boosting Bitcoin's surge around $41,000. But that may be Bitcoin's smash song, and the speculative frenzy surrounding spot Bitcoin ETFs will soon come to an end. Bitcoin's collapse will be more notable than its rebound. By contrast, the rebound in gold is real.”

Mark Jeftovic, a well-known Bitcoin investor, commented under Schiff's post: “Please wake me up when the price of gold breaks through the 1980 inflation-adjusted high.”


Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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