The unease over an upcoming worldwide recession caused by political unrest has the outcome of pushing people to look at investing in assets which are seen as safe-havens for storing value. While traditional assets are widely at the despair of macroeconomics or global political scenarios, Gold and Bitcoin markets look to be the way for people to hedge themselves against economic turmoil.
Since April 2, the price of Gold and Bitcoin has been rapidly rising - in fact the two markets are currently showing the highest correlation between the two assets since 2016. The same cannot be said for S&P 500 or Dow Jones, which simply collapsed after hitting a new peak.
The Digital and Physical Gold Correlation
While some financial commentators are still busy bashing Bitcoin for not being anything like gold when it comes to storing value. The real question we need to be giving thought to is why the correlation? If you are interested in Gold, Bitcoin, both or other cryptos as a means to store value long term or even if you regularly trade them, then I would take note of this correlation.
The correlation between bitcoin and gold is now the highest its been since 2016. pic.twitter.com/jgO6D2xalE— Mati Greenspan (@MatiGreenspan) July 3, 2019
A senior eToro market analyst recently pointed out the two assets have been moving in lockstep over the last month since gold broke through resistance.
Is the correlation a bullish sign for cryptocurrencies?
It is the current fear around the global economy that has caused a massive inflow of capital into gold and Bitcoin markets, due to their scarcity they are seen as a potential economic hedge. Everyday we see mounting tensions between the Trump administration and China over the trade war, along with a worldwide rising tension over the sanctions placed on Iran over oil exports. And to top it off we have Trump making tweets such as these:
The American leader is most likely referring to how Europe's balance sheet is skewed and that many believe China's central bank rigs the forex rates in their favour. Trump appears to be urging the Federal Reserve to follow the fiscal policy of other regions, to debase the United States Dollar as a way to make American exports more attractive.
What does this have to do with gold or cryptocurrency markets?
The outcome of such a fiscal policy will result in lower interest rates and a cheap dollar. Most market analysts agree that a low-interest environment can be a source of hyperinflation, sovereign debt defaults ($22 Trillion US Debt) and other horrible economic events. Essentially, how central banks or even governments act can determine the viability of gold, BTC and other digital assets in the economy. You can even imagine a scenario where the global adoption of crypto happens off the back of a mishap by financial institutions and central bankers, which will cause a massive capital influx into something like Bitcoin.
So does that mean both are the world's global reserve currency?
This could be the direction we are moving towards, that Bitcoin and gold become humanity's first choice as a store of value.
Gold, the chemical element and precious metal enjoys its history as being a store of value and even, historically, a transnational currency. Humans have been attracted to it for centuries, so it only makes sense that it used as an economic hedge during global recessions. No matter what a central authority decides someone will always be willing to buy or sell gold, of course, you need to be able to keep it safe. Hopefully, you have a vault?
Bitcoin, along with other cryptocurrencies, enjoys the same benefits of not being controlled by a central authority. And in BTC case, is not affected by groundless, hidden inflation. It also has the added bonus of not having a physical footprint for storage.
Yes, the correlation could just be a mere coincidence. Yet the timing seems to be too uncanny, especially given the current global landscape. Either way, if the price of gold and Bitcoin continue to correlate or if they diverge, the real message here is that when people are fearing an impending global recession then scarce assets with a hard supply cap will always look like a very good choice. And if they are a decentralized non-sovereign asset, well even better.
Time will tell which of the two assets will win the economic hedge arms race, or if they simply coexist as physical gold and digital gold.