First Mover: Gold Is Crushing Bitcoin, but Inflation May Bring the Cryptocurrency a Boost

Coin Metrics says bitcoin's correlation with gold has increased in recent weeks.

AccessTimeIconApr 15, 2020 at 11:44 a.m. UTC
Updated Sep 14, 2021 at 8:29 a.m. UTC

Is physical gold leaving digital gold behind?

It's a question worth asking, with the yellow metal having rallied over the past four trading sessions to reach a new eight-year high, around $1,725 an ounce.

Gold spot price since 2012.
Gold spot price since 2012.

Gold is up 14 percent in 2020, a superlative performance in what has been an annus horribilis for many traditional markets: stocks, oil and industrial metals like copper and aluminum.

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And what about bitcoin, seen by many investors as a digital form of gold due to its perceived use as a hedge against inflation? It's down 4.1 percent on the year. 


The gap between gold and bitcoin returns has frustrated traders who predict that trillions of dollars of coronavirus-related emergency aid and monetary stimulus from the Federal Reserve and other authorities will eventually lead to inflation. 

The International Monetary Fund on Tuesday estimated that the global economy will shrink 3 percent this year, down some 6.3 percentage points below its most-recent projection in January. What's changed, of course, is the pandemic, which has led to business disruptions and travel cancellations while cratering energy demand and decimating consumer spending.   

"The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes," the Washington-based organization's chief economist, Gita Gopinath, wrote in a blog post

IMF Economic Growth Projections.
IMF Economic Growth Projections.

Recessions are often deflationary: Lower demand alleviates upward price pressure on products and services, while surging unemployment makes it harder for workers to demand wage increases. Deutsche Bank says a U.S. government report on Thursday might reveal another eight million jobless claims filed last week, bringing the four-week total to 25 million – at least 10 times worse than any prior comparable period in the past half-century. The unemployment rate would rise to 17 percent, from 3.5 percent as recently as February. 

Federal Reserve officials appear determined to keep inflation at bay. The central bank targets annual price rises of 2 percent, and Vice Chair Richard Clarida told Bloomberg Television that monetary authorities "have the tools to keep the economy out of deflation." Translation: More money injections are likely. Last week, the Fed's balance sheet ballooned past $6 trillion for the first time in its 107-year history. 

So why isn't bitcoin getting the uplift that gold is enjoying? 

One possible reason, according to Jeff Dorman, chief investment officer at cryptocurrency-focused firm Arca Funds, is the physical metal is so much easier to buy. That's especially true for traditional investors who have long turned to gold as a safe haven during times of economic and market turmoil. 

"Gold can easily be purchased from the same brokerage accounts as stocks/bonds, whereas bitcoin cannot be," Dorman told CoinDesk in an email. "Anyone who sold equities or debt and is sitting in cash needs to put that money to work, and it's easier to purchase gold than bitcoin."

It's as plausible an explanation as any, given that bitcoin was launched just 11 years ago, while gold has served as a symbol of riches at least since the Sumerians civilized Mesopotamia


According to the World Gold Council, an estimated 197,576 metric tons of gold have been mined throughout history. At 32,150.75 troy ounces per metric ton, and based on the current price, that works out to an outstanding value of about $11 trillion. 

That's 87 times the outstanding market value of all bitcoin ever produced, currently about $125 billion, according to CoinMarketCap

"People that have money, investment capital, they're definitely more familiar with gold," says Phillip Meng, who until recently was head of trading for SFOX, a cryptocurrency trading platform. "Gold is definitely preferable to bitcoin at this point because of just the understanding of the asset and access to the asset."

In extremely uncertain times, people might simply gravitate toward things that are more certain. 

"I am skeptical that in the time of a severe recession, people would want to deal with an electronic type of entity," Frank Shostak, an associated scholar of the Mises Institute and chief economist and director of AAS Economics, told CoinDesk's Omkar Godbole on Tuesday.

Bitcoin has been touted by some proponents as an uncorrelated asset that can help to increase returns in an investment portfolio while reducing overall volatility and risk. But that hasn't stopped analysts from spotting occasional periods where bitcoin seems to trade in sync with counterparts from traditional finance, from gold to the Standard & Poor's 500 Index of U.S. stocks to the dollar's exchange rate with the Chinese yuan.

In a report published Tuesday, Coin Metrics, a digital-asset research and data firm, ran the math on bitcoin's correlation with gold. Historically, the correlation hasn't been strong, wrote the analysts, led by Nate Maddrey

But since March 12, the depth of the coronavirus sell-off for bitcoin, the correlation with gold has increased. It's still pretty weak, currently at less than 0.5, where 1 represents perfect synchronicity, 0 is no correlation at all and -1 is a perfectly inverse relationship:


"These are small pieces of evidence that the correlation between bitcoin and gold may be growing," according to Maddrey and the Coin Metrics team. "However, bitcoin’s overall correlation with gold is still relatively weak."

What might be just as interesting, if not more, is that, recently at least, bitcoin does appear to be trading in sync with inflation expectations. The Coin Metrics team analyzed the cryptocurrency's correlation with the 5-year forward inflation expectation rate, as published by the Federal Reserve Bank of St. Louis. Here's what that looks like:


It's a pretty stark up-slope at the far-right end of the chart.

The takeaway?

"Although the short term is still uncertain amidst the global pandemic, this could potentially be a long-term inflection point for bitcoin if federal banks around the world continue to inject money into the global economy at historic rates," according to the report. 

There may be hope yet for the bitcoin bugs.  

Tweet of the day


Bitcoin watch


Trend: Bitcoin is lacking a clear directional bias for the second day with prices trapped in the $6,600–$7,200 range.

The leading cryptocurrency by market capitalization ran into offers near $7,200 over the weekend, as indicated by the long upper wick attached to Sunday's candle. However, the ensuing price dip found buyers near $6,600 on Monday. 

The outlook will remain neutral as long as the $600 range is intact. A move above the top end would open the doors for a rally to $7,800 (target as per the measured move method) – a level last seen before the March 12 crash. Alternatively, a range breakdown could encourage sellers and yield a drop to $6,100. 

The bearish scenario looks most likely currently, as bitcoin's repeated failure to keep gains above the 100-week average of $7,060 over the last two weeks is indicative of bull fatigue. Further, S&P 500 futures are flashing red at press time, alongside losses in the European equities. Investors are selling risk assets, possibly in response to the International Monetary Fund's forecast of a 3 percent contraction in global GDP in 2020.

That said, losses in both stocks and bitcoin could be limited, with the Federal Reserve injecting an unprecedented amount of liquidity into the system via its open-ended asset purchase program. 

Professional investors are also sitting on record amounts of cash, some of which may make its way into the bitcoin market ahead of the next month's reward halving. The event, aimed at controlling inflation, will reduce the amount of bitcoin created every 10 minutes or so from 12.5 BTC to 6.25.

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