Gold has been in the shadow of Bitcoin’s meteoric rise over the past year, struggling to hold its all-time high of USD $2,063 since August 2020 despite increasing inflation. Although gold tumbled 30% from its peak to approximately US$1,700 in March 2021, the precious metal is slowly building support and currently holding above US$1,900 per troy ounce as a result of resurfaced inflation fears from a weaker dollar and retreat in the U.S. Treasury yields.
However, is the reignited inflation fears enough to serve as the catalyst for gold’s bullish re-emergence and allow the yellow metal to solidify its position as a safe-haven asset — or will other asset classes like Bitcoin continue to shine in the spotlight?
Comparing gold and Bitcoin — the highs and lows of the past year
Before assessing if gold is on the verge of a bullish run or a sharp correction, it is important to understand the fundamentals that moved gold and Bitcoin in 2020 and early 2021. In 2020, economic and geopolitical issues such as the U.S.-China trade war, uncertainty around Brexit, as well as the rising global pandemic, pushed gold to hit an all-time high.
However, gold’s value soon spiraled downhill as the U.S. dollar, a safe-haven currency and the global reserve, gained strength — shifting investors’ attention away from gold as they tried to capitalize on the rising U.S. dollar. In addition, gold’s decline was partially caused by a sell-off in the U.S. bond market that drove the price of bonds down while yields rose. Seeing that gold does not offer a real rate of return, investors naturally flocked towards cheaper bonds with higher yields.
While gold suffered, other assets like Bitcoin skyrocketed amidst the global pandemic as a result of increased institutional adoption — with MicroStrategy, Square, and eventually, Tesla making significant Bitcoin purchases. The rapid gains from Bitcoin caught the attention of many investors as they turned their eyes towards the cryptocurrency sector, while gold was left on the sidelines.
Rising inflation pressures — catalyst or correction for gold?
Although Bitcoin reached new all-time highs recently, its volatility has placed it in the spotlight. BTC prices peaked at around US$64,800 in April before dropping by over 50%, to about US$30,000 just a month later on May 17, following a tweet from Elon Musk about Tesla halting to take Bitcoin as payment due to environmental concerns and other negative news.
Gold, on the other hand, is quietly building support and reached a three-month high as a result of rising inflation concerns and declining U.S. yields. Increasing inflation fears are evident in poor U.S. retail sales and un-optimistic consumer sentiment figures — with consumers expecting a 4.6% increase in inflation over the next year — the highest reading in a decade — as more consumers expect inflation to outpace income growth. Growing concerns of inflation have eased market distress about tapering Fed stimulus causing the U.S. dollar to fall to 90.03, (DXY U.S. Dollar Index), close to its three-month low of 89.64 from last week.
In addition, economies like Singapore and Taiwan that have handled the Covid-19 pandemic exceptionally during the year, are now seeing a resurgence in community cases, as well as discoveries of new virus mutations. This has caused both countries to tighten border controls and implement partial lockdown restrictions to contain the virus. As a result, it is likely that both jurisdictions will experience slower economic growth in the next few months as other countries fear another Covid-19 outbreak may happen.
The combination of growing pandemic fears with rising inflation will bolster the appeal of safe-haven assets such as precious metals. In fact, gold and silver prices have steadily increased 6.2% and 3.4% respectively in the past 30 days.
Although Bitcoin has shown little correlation with traditional market movement and is considered by some to be “digital gold,” it still suffers from extreme volatility and does not have a longstanding track record as a safe-haven asset. Real gold, on the other hand, has proven itself over decades as a safe-haven asset during downward trending markets and has been used as a form of value since 550 B.C.
As greater uncertainty and volatility looms around the corner, we are witnessing the re-emergence of gold as it cements its longstanding position as a safe-haven asset, as more investors allocate a greater percentage of their portfolio towards gold as a means to safeguard their wealth. Gold will always have a place in the greater financial sector and its profound benefits will likely become even more relevant in the upcoming months of unpredictability.