“It’s in the nature of bubbles to burst; why then, do we continue to see them in the stock, bond, and currency markets?” – John Mauldin. The cryptocurrency bubble is likely one of the biggest bubbles in history – and it’s not over yet. In this article, I’ll look at how the cryptocurrency sell-off may have helped to boost the gold price to its highest level in at least four years.
Bitcoin’s sell-off this week, which saw the cryptocurrency shed about $3,000 in value, is likely to have played a key role in boosting the appeal of the precious metal.
The fallout from the bitcoin sell-off has helped boost the appeal of gold.May was a testing period for cryptocurrencies like bitcoin (BTC). The flagship digital asset has already fluctuated after jumping to nearly $65,000 in mid-April, driven by traders’ sentiment to lock in their gains. Elon Musk has accelerated sales by scrapping his company’s plan to accept bitcoin as payment for Tesla’s electric cars. Later that month, the People’s Bank of China again urged the country’s financial institutions not to use virtual currencies for payments. Chinese authorities are also starting to closely monitor crypto-mining, the process by which computers mine cryptocurrencies like bitcoin. Further blows to the cryptocurrency sector have come from U.S. fiscal and monetary authorities, including Federal Reserve Chairman Jerome Powell, who said tighter regulation was needed. All in all, a series of negative reports caused the cryptocurrency market to lose more than $500 billion in May. The digital reference index bitcoin also came under aggressive downward pressure, falling 35.50% over the month. Bitcoin is experiencing a sharp reversal on its monthly charts after plunging in May. Source: BTCUSD on TradingView Meanwhile, exchange traded funds that trade physical gold (ETFs) posted their strongest monthly performance since September 2020 in May 2021. According to the World Gold Council (WGC), funds raised a total of $3.4 billion worldwide, up from $4.8 billion in September. In total, US gold ETFs saw inflows of $2.1 billion. European gold ETFs recorded deposits of $1.6 billion. Asian funds that track precious metals prices, however, experienced outflows of about $300 million. Block diagram of the ETFGold. Source: WGC The strong demand for gold ETFs has also boosted the spot price of gold. As a result, the XAU/USD exchange rate rose 7.6% in May to $1,912.785 per ounce.
The opposing movements in the bitcoin and gold markets suggest that a negative correlation between the two has emerged in the short term. Moreover, Wall Street veterans Nick Colas and Jessica Rabe wrote in their DataTrek research report that the virtual currency sell-off may have made gold more attractive to institutional investors. Market strategists predicted that bitcoin would be a riskier alternative to gold. At the same time, they noted that the value of the precious metal has not halved in five weeks due to Elon Musk’s tweets and has not responded to threats from politicians to ban it. Compared to virtual currencies, gold is an investment without drama. Therefore, we always recommend holding 3-5% gold in diversified portfolios. Bitcoin is primarily a speculative gamble for the rich and small individual investors looking for quick profits. But the large supply of BTC has also allowed it to benefit from fears of rising inflation, just like gold. Companies like Tesla, Ruffer Investments, Square and MicroStrategy have added bitcoin to their cash balances. They did so to offset the inflationary risks resulting from the Federal Reserve’s unprecedented expansionary policies, including near-zero interest rates and a $120 billion-a-month asset purchase program. These high-profile investments played a key role in bitcoin’s price doubling in the first quarter of 2021 to $65,000 in mid-April, thanks to leveraged bets and an influx of new retailers into the market. Gold ETFs, on the other hand, have had six consecutive months of outflows through May 2021. Analysts at JPMorgan reported in January 2021 that gold ETFs lost about $7 billion in the same period. The Grayscale Bitcoin Trust (GBTC), a trust run by New York-based Grayscale Investments, has raised $3 billion. The lack of capital inflows into precious metals funds has also depressed their spot prices; XAU/USD ended the first quarter of 2021 down 10.14%, compared to bitcoin’s 100% return. In May 2021, another report from JPMorgan indicated that large institutional investors had seized on bitcoin to seek opportunities in gold. They cited data on open interest in bitcoin futures on the Chicago Mercantile Exchange, which saw the biggest drop since October 2020. said analysts at JPMorgan: The picture of bitcoin inflows continues to deteriorate, indicating continued restructuring by institutional investors.Bitcoin (orange) has an inverse trend to gold (pink) in 2021. Source: TradingView The claims came as Ruffer Investments, a U.K.-based fund that manages about $33.95 billion in assets and charities, also announced Tuesday that it had unloaded its entire bitcoin position and made $1.56 billion in profits. Duncan McInnes, chief investment officer of Ruffer, told Finance Times that they have shifted funds into gold, commodity stocks and inflation-linked bonds. McInnes added that bitcoin is still on the menu for Ruffer’s possible future investments, noting that the world is in desperate need of a new safe haven against ultra-low bond yields.Gold is a bright spot in the cryptocurrency world. The yellow metal has seen a massive surge in value in recent weeks, driven by uncertainty over the fate of the cryptocurrency market. While several analysts had predicted the gold price would continue to rise in the spring, it appears to have enjoyed an unexpected boost after bitcoin unexpectedly fell on March 11. The sell-off prompted some investors to think the gold mining industry could be a good alternative to bitcoin.. Read more about bitcoin expert predictions and let us know what you think.
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