We often hear Bitcoin referred to as “digital gold,” but does its price really correlate with that of gold?
Analysis of the price of gold and Bitcoin
Over the long term it seems not, but there are indeed some periods when they follow similar trends. However, the reason may not be a true correlation, but a common cause.
The price of gold
Taking as a reference February 2020, which is the period just before the start of the pandemic, the price of gold appeared to be on the rise. In fact, from $1,200 an ounce in October 2018 it had risen to over $1,600 an ounce, an increase of more than 33% in fifteen months.
It is worth noting that daily percentage swings in the price of gold are often very small, so +33% in 15 months is not small for a risk-off asset like gold.
In March 2020, as the global financial markets collapsed due to the onset of the pandemic, the price of gold first fell to about $1,400, but starting in April it rose again to close to $2,100 in August of that year.
So the onset of the pandemic caused the price of gold to rise by 25% in just over three months after an initial brief decline.
Since then, namely from August 2020, it has never risen further, falling as low as $1,700 in March 2021, and then rising again toward $2,000 in March 2022. So from August 2020 to March 2022 it first dropped slightly, and then rose back above $2,000.
This behavior is not surprising, and in fact except for the sharp and rapid rise in 2020 it is nothing particularly interesting.
What is interesting, on the other hand, is the fact that during 2022 it fell as low as $1,600 in September, which is the same level from which this whole dynamic began in February 2020, but then rose back above $1,900 in January of this year.
The very fact that in 2022, as the markets collapsed due to the bursting of the 2021 bubble, and with inflation rising to record highs in recent decades, the price of gold fell, suggests that a small speculative bubble also formed on its price between 2020 and 2021.
At this point, what might be even more surprising is the return to $1,900 in 2023, but perhaps this time gold is simply doing its job as the ultimate safe haven asset after the excesses of the past three years.
With the collapse of the financial markets in March 2020 it plummeted to $4,000, meaning it fell in the same way that gold’s had fallen, but much more.
However, the price of Bitcoin had also recovered its March losses by April 2020, but unlike gold it did not begin an upward phase.
It was necessary to wait until November to see it rise, first to $20,000 and then even to $25,000 in December, kicking off the last major bull run.
This bull run was marked by a first period of growth, until April 2021, followed by a decline until July of that year, and a second period of growth from late July to mid-November, followed by a slump that would seem to have ended only in November 2022.
Bitcoin’s price in January 2023 also recovered slightly, although much less than that of gold did, making due allowances regarding the very different average volatility of the two assets.
The correlation between the price of Bitcoin and that of gold
Clearly, these two dynamics do not coincide, but there have been similarities at times.
First, the 2020 growth after the post-collapse recovery.
In fact, between late March and early April 2020 the Fed kicked off the largest money creation campaign it had ever done, but while this seemed to have an immediate effect on the price of gold, which lasted only five months, it did not immediately have an effect on Bitcoin.
However, seven months later it began to have an effect on Bitcoin’s price as well. In this case, the timing does not coincide, but the trends do, given due proportion. The difference lies in that seven-month delay in the start of Bitcoin’s bull run compared to that of gold, and on the fact that the Bitcoin run, although divided into two phases, lasted twelve months and not five.
However, during 2021, the price of gold also declined. That is, the price of gold also grew at two distinct times, one in 2020 and the other in 2022, although the latter should be due to the outbreak of war in Ukraine.
Even the subsequent decline might be vaguely reminiscent of Bitcoin’s price collapse, which also occurred in 2022, although it was much shorter and, more importantly, much smaller.
In other words, putting aside the very different amplitudes of the price fluctuations of gold compared to that of Bitcoin, we can say that in both cases there was a first strong rise, followed by a decline and a second rise similar to the first.
The three big differences are that the timing does not coincide, even though the sequence of the various trends is the same but shifted by a few months, that the one in 2022 for Bitcoin was a real collapse, while for gold it was not, and most importantly that in 2023 the price of gold returned relatively close to the 2020 highs, while that of Bitcoin is still a long way from the 2021 highs.
The common cause
The two trends appear obviously unrelated, but they may have a common cause, namely the Fed’s monetary policy.
In fact, when comparing with the Dollar Index it can be discerned, broadly speaking, that both the price of gold and Bitcoin over the long run tend to rise when the US dollar falls, while they suffer when investors bet on the dollar. This is probably a trivial matter of liquidity and risk exposure, or simply a decrease in the opportunity cost between risk-free and risk-on assets.
It is worth noting that as of November the Dollar Index has been falling, and gold’s price has been rising. Whereas that of Bitcoin is not, due to the problems generated to crypto markets by the FTX fiasco.
Who knows whether again this time, as in 2020, a rise in the price of gold will lead the way for a subsequent rise in Bitcoin with a few months delay.