Bitcoin robs from gold as precious metal sinks below $1,800

Bitcoin could challenge gold's appeal as a hedge against future inflation risk'

Bitcoin’s emergence as an investment thesis on Wall Street has tarnished some of gold’s allure.

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The cryptocurrency became a Wall Street darling as its price soared by as much as 721% from its March low through January of this year crossing the $40,000 level before easing.

Courtesy: Coindesk 

Its parabolic ascent has drawn the attention of firms including BlackRock, the world’s largest asset manager, and the support of tech entrepreneurs like Tesla CEO Elon Musk.

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“The Bitcoin craze does seem to have detracted from funds that would ordinarily have gone to the gold market,” wrote David Rosenberg, chief economist and strategist at the Toronto-based Rosenberg Research.”

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He says statistical work conducted by his firm found that the gold price would be higher by at least $200 per ounce had all that money not poured into bitcoin. The cryptocurrency’s investment market has grown to 20% the size of bullion.

Bitcoin in 2020 became more widely accepted as an investment vehicle on Wall Street as money managers looked for new ways to capitalize on the massive amount of stimulus provided by the Federal Reserve.

The central bank last year slashed interest rates to near zero, pledged to buy an unlimited amount of assets and extend up to $2.3 trillion in loans to support the economy from its COVID-19-induced slowdown, the sharpest of the post-World War II era.

Bitcoin could “challenge gold's appeal as a hedge against future inflation risk,” said Bluford Putnam, managing director and chief economist at CME Group.

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Putnam points to bitcoin’s “tightly constrained” supply and the expectation that gold production will increase this year as evidence. He also noted that fluctuations in gold prices appear to be mostly tied to policy shifts by the Federal Reserve.

Rosenberg also noted that recent weakness in gold prices can be attributed to real yields, or a bond’s nominal yield minus the rate of inflation, “becoming increasingly less negative” and the amount of global bonds with below-zero yields reaching a three-month low.

The price of an ounce of gold settled at $1,832 per ounce on Wednesday after climbing to as much as 35% last year to a high of $2,051 as investors priced in the aggressive policies of the Fed.

The gains came while appetite for jewelry and other physical gold fell due to many retailers having to temporarily close their doors to help slow the spread of COVID-19.

Not everyone is convinced the gold market only moves as a result of the Fed’s actions.

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James O’Rourke, a commodities economist at the London-based research firm Capital Economics, says a rebound in consumer demand will support prices this year.

“A revival in jewelry consumption in key consumers India and China will put a floor under the gold price this year, even as investment demand for gold eases back slightly,” he wrote.

Analysts at the chief investment office of UBS Global Wealth Management note a 14% drop in aggregate gold demand last year proves that investor flow – not jewelry demand nor central bank buying – dictate prices.

They say the direction of real interest rates, the U.S. dollar and market uncertainty will be the important price drivers into early 2022.

“With the US recovery gathering pace in 2H, real interest rates are likely to start rising and, therefore, weigh on gold prices,” wrote a team led by Wayne Gordon. “On the other hand, we anticipate further USD weakness to support prices.”

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Net-net, the UBS analysts see gold climbing above $1,900 an ounce during the first half of this year before falling to $1,800 in early 2022.

“While our forecasts show limited upside for gold from a tactical standpoint, its strategic role in a portfolio context remains highly relevant,” they wrote.