Bitcoin continues to outshine gold amid calls for more fiscal spending to boost the U.S. economy back to full strength.

The world’s biggest cryptocurrency set a record price of $55,707.21 on Friday before settling back to $54,898.62, up 5.6% over the last 24 hours, having scaled the $50,000 mark two days prior, according to CoinDesk 20 data. Meanwhile, gold fell to $1,760 a troy ounce early Friday, its lowest level since July 6, 2020, per TradingView.

In an interview with CNBC on Thursday, U.S. Treasury Secretary Janet Yellen said that the proposed $1.9 trillion stimulus package could help the U.S. get back to full employment in a year. She added that the risk associated with delivering too little stimulus is greater than the cost of doing something big. The Federal Reserve and the U.S. government have already pumped massive liquidity (dollars) into the system over the past 11 months to support the ailing economy. Increased fiscal spending is generally viewed as leading to inflation. Both gold and bitcoin, with their constrained supplies, are considered hedges against inflation, and so both tend to thrive in the face of more government spending or money-printing by central banks.

But that’s not what’s happening now. Gold, a classic store of value asset, is nursing losses at press time, while bitcoin is extending its bull run. Since August, the two assets have mostly moved in opposite directions, convincing the likes of payments company MicroStrategy’s CEO Michael Saylor that the cryptocurrency is a better inflation hedge than gold. The business intelligence firm has used a significant part of its treasury reserves to invest in bitcoin.

The divergence between the two has become pronounced since the start of the year, with bitcoin charting a steep rise from $30,000 to $52,000 and gold falling from $1,951 to $1,760. That has triggered speculation that bitcoin is rallying at the expense of gold.

Source: Macro analyst Holger Zscaepitz, Bloomberg

Traditional market analysts are associating gold’s losses with the rise in the U.S. treasury yields. The 10-year yield set an 11-month high of 1.33% on Wednesday and has gained more than 35 basis points this year. With authorities calling for more spending, yields could continue to rise, keeping gold under pressure.

If the rally in bond yields continues, it could wind up hurting bitcoin as well as gold. First, it could trigger a rotation of money out of equities and into bonds. The resulting decline in the stock markets and the strength in the U.S. dollar could pull bitcoin lower.

Further, momentum funds that bought bitcoin as a store of value asset may sell if real or inflation-adjusted yields rise, as discussed earlier this week.

Also, additional bearish pressure may arise from the drop in the the global stock of negative-yielding debt. The tally has declined by $3 trillion this year to below $15 trillion – the lowest since September. A negative-yielding bond offers less money at maturity than the original buying price. Investors typically turn toward store of value assets such as gold and bitcoin when the number of bonds offering negative yields is rising.

Global stockpile of negative-yielding bonds
Source: Holger Zschaepitz, Bloomberg

Bitcoin’s rally picked up the pace in the final quarter of 2020 as the global stockpile of negative-yielding bonds reached record highs above $18 trillion. Also read: Bitcoin Hits New High Above $51K, Shrugging Off Rising Bond Yields

UPDATE (Feb. 19, 2021 14:51 UTC): Updates to reflect new record BTC price above $53,000.
UPDATE (Feb. 19, 2021 19:27 UTC): Updates to reflect new record BTC price above $55,000.

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