Gold has recently reached an all-time high, soaring to $2,564 per ounce on Friday. This increase marks a 10% gain in the current quarter alone. In stark contrast, Bitcoin (BTC), often referred to as digital gold, is experiencing difficulties, trading at nearly $58,000 and reflecting a 7% loss for the quarter, as per CoinDesk data. Such contrasting performances raise questions about the underlying factors influencing each asset.

The impressive rise in gold’s value stands out even more when compared to the performance of Wall Street’s benchmark index, the S&P 500, which has achieved only a marginal 2% increase this quarter. This divergence is particularly striking given that Bitcoin has been closely correlated with technology stocks recently, amid growing concerns surrounding a potential U.S. economic recession. Additionally, there are fears regarding the unwinding of “risk-on yen carry trades,” which have further complicated Bitcoin’s position in the market.

Understanding the Factors Behind Gold’s Success

Most analysts believe that specific factors are contributing to the ongoing divergence between Bitcoin and gold, with the latter’s recent rally suggesting promising macroeconomic conditions for cryptocurrencies in the near future. Charlie Morris, the chief investment officer and founder of ByteTree, attributes gold’s upward trajectory to an increase in accumulation by central banks. This dynamic is particularly noteworthy as Bitcoin does not currently enjoy the same level of institutional backing.

Morris elaborates, stating, “The appeal of government bonds in reserves is diminishing, and gold has stepped up. Many central banks are accumulating gold, which used to be priced off U.S. Treasury inflation-protected securities but is now influenced by global factors like structural government deficits.” This accumulation trend indicates a shift in monetary policy, suggesting that easing measures may be on the horizon.

The Role of Monetary Policy and Fiat Money Supply

The year-over-year change in the combined fiat money supply growth of the U.S., Eurozone, U.K., and Japan turned positive in August and is expected to continue rising as central banks embark on renewed liquidity easing. The European Central Bank (ECB) recently cut interest rates, and the Federal Reserve (Fed) is anticipated to follow suit, potentially signaling the start of a new easing cycle. As a result, U.S. investors may soon hear the echoes of stimulus funding, which could have significant implications for both gold and Bitcoin.

André Dragosch, head of research at ETC Group, suggests that gold’s rally likely indicates an impending sharp decline in inflation-adjusted U.S. government bond yields. Historically, lower real yields have prompted investors to pivot towards riskier assets such as Bitcoin and technology stocks, as witnessed in 2020. Dragosch asserts, “Gold prices have completely decoupled from U.S. real yields. This implies two things: Either gold is overpriced, or it is anticipating a massive decline in U.S. real yields.” Such a decline would equate to a significant easing of monetary policy, which has yet to be fully priced into broader financial markets, except for gold. This situation suggests that Bitcoin and other assets could soon follow gold’s upward trajectory.

Central Bank Activity and Market Dynamics

Recent data from the World Gold Council reveals that central banks purchased 37 tonnes of gold in July alone, doubling the net purchases from the previous month. This figure marks the highest monthly accumulation since January when 45 tonnes were purchased. In 2022, central banks collectively acquired 1,037 tonnes of gold, making it the second-highest annual purchase in history, following a record 1,082 tonnes purchased in 2021.

In contrast, the Bitcoin market has faced significant challenges, with billions of dollars in supply hitting the market since June. This surge in supply can be attributed to several factors, including liquidations by Germany’s Saxony state, reimbursements to Mt. Gox creditors, and U.S. government actions. Additionally, the demand for U.S.-listed spot exchange-traded funds (ETFs) has weakened in recent months, resulting in a net outflow of approximately $1 billion since late August, according to data from Farside Investors.

Implications for Bitcoin Moving Forward

The challenges facing Bitcoin, particularly the significant outflows and supply increases, help explain its recent lackluster performance. The founders of the LondonCryptoClub newsletter service noted, “Gold is anticipating lower real rates, rising liquidity, and a softer dollar, much like Bitcoin. However, the supply/demand dynamic is different: Gold has seen substantial demand from central banks with minimal negative supply, while Bitcoin has had to absorb considerable supply in recent months.” This discrepancy suggests that the short-term outperformance of gold could provide insights into Bitcoin’s potential future movements.

However, not all participants in the crypto market are optimistic about gold’s rally as it pertains to Bitcoin’s trajectory. Alex Kruger, a partner at Asgard Markets, warns against overinterpreting the implications of gold’s rise for Bitcoin. He states, “It’s irrelevant. Bitcoin never trades with gold. When you look too intently into something, you end up seeing what you want to.” This perspective emphasizes the unique nature of Bitcoin as a risk-on asset, which thrives in an overheating economic environment, while gold is typically favored in risk-off scenarios.

The Future Outlook

As the financial landscape continues to evolve, traders should remain vigilant of potential growth scares similar to those experienced in August, which caused Bitcoin to plummet to $50,000. A potential 50 basis point rate cut by the Fed next week could trigger similar market anxieties. Morris highlights this dynamic, stating, “Bitcoin is a risk-on asset, while gold is a risk-off asset. Gold prefers a cooling system with falling rates, whereas Bitcoin flourishes when the system is overheating.”

In conclusion, the current divergence between gold and Bitcoin presents a fascinating case study in the financial market. As central banks continue to accumulate gold and monetary policies shift, the implications for both assets will be closely watched. Understanding these dynamics will be crucial for investors navigating this complex landscape.