Why did gold prices plummet and Bitcoin continue to rise after both broke through on Monday?
After both Bitcoin and gold rose on Monday, the price of gold plummeted while Bitcoin continued to rise. This is because Bitcoin is seen as a victory for risky assets rather than a safe haven asset. The increasing expectation of a rate cut by the Federal Reserve has heightened investors' interest in risky assets. Investors currently hold record levels of cash and are eager to make new investments, which has contributed to the rise of risky assets such as Bitcoin. The rise of Bitcoin is mainly driven by the optimistic sentiment that the U.S. Securities and Exchange Commission may soon approve ETFs for direct investment in cryptocurrencies, unrelated to macroeconomic factors. The rise in gold prices does not seem to be as strong as Bitcoin, and the price of gold has yet to break through the high point of 1980.
As expectations of a rate cut by the Federal Reserve heat up, both Bitcoin and gold, which have been under pressure before, seem to have finally entered a springtime.
On Monday, Bitcoin broke through $40,000 during trading, reaching its highest level since May 2022. It continued to rise throughout the day, closing at a trading price of over $46,000, erasing all the declines caused by the collapse of the stablecoin TerraUSD last year. Currently, the market value of Bitcoin has surpassed Berkshire Hathaway, owned by Warren Buffett.
At the same time, the price of gold has also reached a new all-time high, but its upward momentum seems to be not as strong as Bitcoin's. Spot gold and gold futures both hovered around $2,150 in the Asian market before turning lower after hitting a new high in early trading. Overnight, the decline in US stocks expanded to over 2%. Moreover, when adjusted for inflation, the price of gold has not yet surpassed its high point in 1980.
On Tuesday, the price of spot gold rebounded slightly, currently hovering around $2,035, a decrease of $115 from Monday's high.
The fact that gold prices fell after breaking through and Bitcoin continued to rise is actually a victory for Bitcoin as a risk asset.
Risk Assets vs. Safe Haven Assets
David Tawil, President and Co-founder of digital asset fund ProChain Capital, stated that the rise in Bitcoin is mainly driven by optimism about the US Securities and Exchange Commission (SEC) potentially approving ETFs for direct investment in cryptocurrencies, rather than macroeconomic factors.
Analysis suggests that since Bitcoin is a risk asset rather than a safe haven asset like gold, expectations of a rate cut by the Federal Reserve usually increase investors' interest in risk assets.
According to data from the Investment Company Institute, investors currently hold a record level of cash, with money market funds totaling $5.7 trillion. They are eager to make new investments, and this sentiment helps drive up risk assets like Bitcoin.
Tawil believes that the simultaneous breakthrough of Bitcoin and gold to new highs may just be a coincidence, and cryptocurrencies will continue to rise towards the end of the year, reaching a high of $47,000 when Bitcoin ETFs are approved.
James Harte, an analyst at Tickmill Group, pointed out that the US non-farm payroll report released on Friday is crucial for gold.
Harte stated that if the report is weaker than expected, it may put further pressure on the US dollar and drive gold prices higher. On the other hand, gold prices may perform poorly if the report is not favorable.
Expectations of Fed Rate Cuts Drive Gold and Bitcoin to Soar
However, it is undeniable that the expectations of Fed rate cuts are positive factors for both gold and bitcoin.
Mark Connors, Research Director at digital asset management company 3iQ, stated that both assets have seen an increase in value due to the optimistic belief that the Fed has completed its rate hikes and may start cutting rates as early as March next year.
According to the CME FedWatch tool, futures traders predict that there is over a 50% chance that the Fed will lower the key interest rate by 25 basis points at the March meeting, compared to 21.5% a week ago.
FactSet data shows that the 10-year Treasury yield has dropped significantly in the past month, declining by 39 basis points.
Greg Magadini, Director of Derivatives at Amberdata, stated that the decline in Treasury yields is a positive factor for both gold and bitcoin. Since neither gold nor bitcoin pay interest, higher government bond yields reduce the attractiveness of these assets.
Magadini pointed out that the trends of gold and bitcoin have often been synchronized this year, such as after the regional bank crisis in the United States in March and the outbreak of the Israeli-Palestinian conflict in October.
Gold and Bitcoin: Who Will Go Further?
In fact, analysts have differing opinions on the sustainability of the trends of gold and bitcoin.
Peter Schiff, Chief Market Strategist at Euro Pacific Asset Management and well-known gold bull, posted on social media X (formerly Twitter):
"The drop in gold prices below $2,100 has helped propel bitcoin to around $41,000. But this may be bitcoin's swan song, as the speculative frenzy surrounding physical bitcoin ETFs will soon come to an end. The collapse of bitcoin will be more remarkable than its rebound. In contrast, the rebound of gold is real."
Mark Jeftovic, a well-known bitcoin investor, commented below Schiff's post, saying, "Wake me up when gold breaks through its inflation-adjusted high in 1980."
