The last few weeks have seen a dramatic divergence in the fortunes of gold and bitcoin as a wide range of strategists and talking heads note that “there also seems to be an increasing demand to use Bitcoin where Gold used to be used to hedge Dollar risk, inflation and other things.”
And that has translated into a drastic collapse in the correlation between the two assets…
But, while JPMorgan has pushed the idea of a structural “gold-to-bitcoin” flow, Goldman Sachs says in their latest note that “Bitcoin and gold can coexist.“
As Goldman’s Jeff Currie writes, gold’s recent underperformance versus real rates and the dollar has left some investors concerned that Bitcoin is replacing gold as the inflation hedge of choice.
While there is some substitution occurring, we do not see Bitcoin’s rising popularity as an existential threat to gold’s status as the currency of last resort.
Both institutional investors and wealthy individuals avoid cryptocurrencies due to its inherent transparency issues, while speculative retail investment causes Bitcoin to act as an excessively risky asset.
In fact, since the depths of the first lockdown Bitcoin’s rise has closely tracked that of copper, a key proxy for global growth.
In our view, bitcoin is the retail reflation trade while gold is a defensive asset with long-term real capital preservation.
In addition, gold’s recent sell off was more closely aligned to a vaccine-driven risk-on rotation, rather than an abandonment of gold as a hedge against debasement.
Such aggressive rotation historically doesn’t last too long as investors quickly re-balance their portfolios. Therefore, in early 2021 we expect gold ETFs to rebuild.
Given the rising inflation expectations, weakening dollar and lofty valuations in some risky assets, demand for safe-haven inflation hedges should remain supported next year, continuing to push gold higher towards our $2300/toz target.
On balance, we do not see evidence that Bitcoin’s rally is cannibalizing gold’s bull market and believe the two can coexist.