The directly proportional correlation between Bitcoin and gold in the recent rally, during which both assets have surged to record highs, is surprising and sending mixed signals about global investors' risk appetite.
For the first time in over a decade, cryptocurrency and precious metals are experiencing simultaneous increases, marking a significant milestone since Bitcoin's emergence from obscurity.
Bitcoin soared to a record high of over $73,000 earlier this month, surpassing its previous life high of around $69,000 in November 2021.
Gold hit an all-time high of above $2,200 an ounce for the first time on Wednesday after the Federal Reserve kept its prediction of three rate cuts for this year, even though inflation has recently risen.
Different Approach, Same Result
However, different factors influence gold and Bitcoin. Gold has long been considered a haven, while the true purpose of Bitcoin is a topic of intense debate.
Investments in newly established US ETFs that hold Bitcoin directly have played a significant role in the digital currency's impressive 50% price surge this year.
Alternatively, the rise in gold prices could indicate that investors are adopting a cautious approach due to concerns about geopolitical tensions or the possibility of a market downturn after a prolonged period of growth.
One common theme for both assets is the Federal Reserve's pivot from aggressive rate hikes to easing bets.
The odds of a Fed interest-rate cut in June, as seen in the swaps markets, are 62% after the central bank meeting on Wednesday, up from about a 50-50 chance at the end of February.
In addition, the current state of the bull run in stock markets and general risk appetite could be intertwined with the narrative surrounding cryptocurrencies.
Investors often compare cryptos and tangible assets like gold, especially during low-yield situations like the COVID-19 pandemic.
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In the current market climate, geopolitical concerns, potential stock market declines, and expectations of monetary easing are the primary drivers behind the fluctuations in gold prices.
There is a clear divide in the drivers of the asset classes.
One must examine how traders who follow short-term trends across different asset classes act to bring things full circle.
ETF Flows Against the Tide
ETF investors have been going against the grain and selling Gold derivatives.
Investors in ETFs seem to have more faith in Bitcoin, or "digital gold," as its proponents call it, than in the real precious metal itself, as both hit new price records.
Despite both assets' reputation as inflation hedges and stores of value, media reports show that gold ETFs have lost about $4.6 billion this year. At the same time, the ten US-based Bitcoin ETFs had a record-breaking debut in January, with net inflows of over $8 billion.
"Gold's usually a rather predictable asset. Given a bunch of well-identified inputs, its price swings are easy to explain. That's not been the case lately, with prices soaring to records even as financial drivers said they should fall. But what's even more remarkable is that holdings in ETFs have continued to fall," said James Wong, Asia Fixed Income Portfolio Manager at GaoTeng Global Asset Management in Hong Kong.
"It's really not clear why ETF investors are taking such a starkly different view of the outlook for the metal. Perhaps they just see better opportunities for their money in Bitcoin or the Nasdaq. Or perhaps prices just haven't soared enough to attract attention. But regardless of the reason, a turn in this sector will be crucial in determining the longevity of the rally," Wong added.
One thing is certain: ETF investors will soon follow the herd back into betting in favor of gold, especially when global central banks are looking to step away from high-interest rate scenarios.
Separately, there are indications that the ETF flows into Bitcoin funds are starting to evaporate.
The original cryptocurrency hasn't stayed at its new all-time high for very long. Since the latest peak, it has seesawed between $62,000 and $69,000. There are doubts over the long-term viability of Bitcoin's recent ascent, which has encountered a speed bump.
After weeks of speculation about its potential to reach six figures, Bitcoin's value has dipped, reviving concerns about the cryptocurrency's intrinsic volatility.
