Insight

Gold and bitcoin outlook

Gold and bitcoin outlook

Fighting for the spotlight from the recent breakout of AI-related stocks, has been a record rally in gold and bitcoin, which appears to be benefiting from a downdraft in real yields.

Gold hit a new all-time high this week (Thursday, 7 March 2024) of $2,165/troy oz. This was due to a clutch of factors: heightened tensions in the Red Sea; a net increase in long gold futures positions; and another month of additions to reserves by China’s central bank.

Weaker US data also helped to lift the gold price. Traditional drivers of gold have recently disconnected in determining the metal’s price but retain signaling power in terms of price direction.

With US interest rate cuts yet to materialize, the underlying expectation of lower real yields and a weaker USD would suggest the direction of gold would be higher from here; indeed, the gold-to-metals ratio typically peaks 12 months after rate cuts begin.

Source: Bloomberg, data as at 7 March 2024. Past performance is not indicative of future performance. 

Gold and bitcoin (so-called “digital gold”) have one fundamental aspect in common: they are both zero-yielding assets. Therefore, as opportunity costs rise (higher real Treasury yields), gold and bitcoin are theoretically less attractive and so fall in price.

Popular valuation models of gold focus on the value of the USD (gold is priced in USD) and real yields (reflecting opportunity costs). Bitcoin appears to be driven by similar factors, leading to the interesting coincidence of both gold and bitcoin registering new all-time-highs last week (week commencing 4 March 2024).

Recently, central bank buying of gold has become a key driver of gold prices. We can make a similar observation about bitcoin, with recent ETF flows powering a substantial rally.

It seems that the missing component to models of both bitcoin and gold is flows. Perhaps bitcoin has more in common with gold than once thought.

I think a rough ballpark for the next all-time high for bitcoin is somewhere around 75,000, but it really depends on how long buying momentum is sustained. At the very least, every time a prior peak is breached, prices have tended to retrench temporarily. I expect we'll see that this month, followed by a leg higher.

With contributions from Emma McHugh and Ashley Oerth.

Investment Risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Investing in cryptocurrencies is high risk. Cryptocurrencies do not have any intrinsic value and may become worthless. Cryptocurrencies are subject to extreme price volatility and the price of cryptocurrency can be affected by factors such as global or regional political conditions and regulatory or judicial events. Bitcoin has historically exhibited high price volatility relative to more traditional asset classes, which may be due to speculation regarding potential future appreciation in value. The value of an investment in bitcoin could decline rapidly, including to zero.

Footnotes