Recent Performance of Bitcoin and Gold

In the past five days, bitcoin (BTC) has experienced a significant surge of 7%, reaching the notable milestone of $64,000 for the first time since August 26. This resurgence in bitcoin’s price comes at a time when gold has also been making headlines, achieving all-time highs on more than 30 occasions this year and surpassing the $2,600 mark per ounce. These remarkable performances highlight a rare phenomenon where both bitcoin and gold are recognized as the top-performing assets of the year, a trend noted by Charlie Bilello, the chief market strategist at Creative Planning, an investment management and financial planning firm.

Year-to-Date Performance and Historical Context

Year-to-date, gold has seen an impressive rise of 27%, outpacing its performance in 2020, which was recorded at 25%. The last time gold performed better than this was in 2007. This upward trajectory raises the question: what factors are driving this impressive rise in both gold and bitcoin?

Gold as a Safe Haven Asset

Gold has historically been regarded as a hedge against monetary debasement and a safe haven during periods of global uncertainty. The current economic landscape, characterized by inflationary pressures, geopolitical tensions, and a fluctuating financial environment, suggests that gold is once again fulfilling its traditional role as a protective asset. Notably, the rally in gold prices began prior to the significant monetary debasement triggered by the Covid pandemic in 2020, indicating that investors were already seeking refuge in gold amidst rising uncertainties.

Bitcoin’s Rise and Market Dynamics

While gold has established itself as a go-to asset in turbulent times, bitcoin has emerged as a formidable player in the financial landscape, particularly since late 2020 and into 2021. Currently, bitcoin is just 14% away from its all-time high, sparking discussions about whether it is playing catch-up to gold’s performance. A closer examination of bitcoin’s price movements reveals a correlation with the Federal Reserve’s net liquidity metrics. This metric is calculated by subtracting reverse repo balances and the Treasury General Account from the Fed’s balance sheet, and it suggests that bitcoin’s price trends often align with liquidity conditions in the market.

Liquidity Trends and Economic Indicators

Both bitcoin and net liquidity hit a low point towards the end of 2022, which coincided with the collapse of the FTX cryptocurrency exchange, a pivotal event that contributed to market volatility. Since then, bitcoin has experienced a steady rise, paralleling an increase in net liquidity, which currently exceeds $6 trillion. The Federal Reserve’s balance sheet stands at approximately $7.1 trillion. Although the Fed is still engaged in quantitative tightening, the pace has notably slowed, allowing for more liquidity to flow into the market.

The collapse of Silicon Valley Bank (SVB) in March 2023 resulted in a $1.6 trillion reduction in the Federal Reserve’s balance sheet, bringing it back to levels observed during the initial phases of quantitative easing in response to the pandemic. This reduction has had a profound impact on market liquidity, creating conditions more favorable for asset prices to rise, including that of bitcoin.

The Role of Central Banks and Interest Rates

Moreover, the draining of reverse repo balances, which are currently just over $300 billion, has released substantial liquidity back into the financial system. This influx of liquidity is stimulative, enhancing the availability of funds for lending, investment, and overall economic activity. The combined balance sheets of the world’s 15 largest central banks—including those of the U.S., European Union, Japan, and China—approach a staggering $31 trillion. While the sheer size of this figure is noteworthy, the trend of increasing balance sheets indicates a global resurgence in liquidity, which tends to have a particularly stimulative effect on assets like bitcoin.

Recent Federal Reserve Actions

Adding to the bullish sentiment, the Federal Reserve recently cut interest rates by 50 basis points. This decision is viewed as a measure to support economic growth and stabilize financial markets, further bolstering the appeal of both bitcoin and gold as investment options. When interest rates are lowered, the opportunity cost of holding non-yielding assets like gold and bitcoin decreases, making them more attractive to investors seeking to preserve purchasing power in an environment characterized by inflation and currency depreciation.

Conclusion

In summary, both bitcoin and gold are currently experiencing significant upward momentum driven by a combination of factors, including monetary policy changes, liquidity dynamics, and broader economic uncertainties. As these assets continue to evolve in response to global financial conditions, investors are keenly observing their trajectories, particularly in light of historical trends and the ongoing economic landscape.