Bitcoin and gold, two assets that are often compared as inflation hedges, have shown a significant divergence in their price movements in the past week. While bitcoin has bounced back from its recent lows, gold has plunged to its lowest level since March 2020. What is behind this decoupling and what does it mean for the future of both assets?
Bitcoin Breaks Correlation with Gold
Bitcoin and gold have been moving in tandem for most of 2022, as both assets were seen as safe havens against the rising inflation and monetary expansion caused by the COVID-19 pandemic. However, since February 2023, the correlation between the two assets has weakened, and in the past week, it has turned negative. Bitcoin has gained about 10% in the past seven days, while gold has lost more than 7% in the same period.
One possible explanation for this divergence is that bitcoin is benefiting from its growing adoption and innovation, while gold is suffering from its lack of utility and liquidity. Bitcoin has seen a surge of institutional and retail demand, as well as new developments such as the launch of the first bitcoin exchange-traded fund (ETF) in Canada and the integration of bitcoin payments by PayPal and Venmo. Gold, on the other hand, has faced headwinds from the rising bond yields, which make it less attractive as a store of value, and the lack of physical demand, especially from China, which is the world’s largest consumer of gold.
China Sells Gold to Support Yuan
Another factor that may explain the bitcoin-gold decoupling is the situation in China, which is facing a severe dollar shortage and a credit crunch. According to a recent article by Bitcoin Magazine, China has lifted its quota on gold imports to reduce the need for local banks to buy dollars. This means that China is selling its gold reserves instead of its dollar reserves to support its currency and preserve its foreign exchange reserves
This move by China may have a significant impact on the global gold market, as China accounts for about 14% of the world’s gold demand. The increased supply of gold from China may put downward pressure on the gold price, while the reduced demand for dollars may ease the dollar shortage and lower the bond yields. This may also benefit bitcoin, as it reduces the opportunity cost of holding bitcoin over bonds or dollars.
Bitcoin vs Gold: A Long-Term Perspective
While bitcoin and gold may have diverged in the short term, they may still share some common characteristics in the long term. Both assets are scarce, decentralized, and censorship-resistant, which make them appealing as alternatives to fiat currencies and traditional financial systems. Both assets also face similar challenges, such as regulatory uncertainty, market volatility, and environmental concerns.
However, bitcoin also has some advantages over gold that may give it an edge in the future. Bitcoin is more portable, divisible, and verifiable than gold, which makes it more suitable for digital transactions and global trade. Bitcoin is also more adaptable and innovative than gold, as it can evolve with new technologies and protocols to meet changing needs and preferences. Bitcoin may also have a higher growth potential than gold, as it is still in its early stages of adoption and development.
Therefore, while bitcoin and gold may have different price dynamics in the short term, they may still complement each other in the long term as alternative assets that offer protection against inflation and systemic risks.