Bitcoin has been on the rise since the start of December 2020. Many now wonder, do the rapid surge in the BTC price and the slide in the gold price in the last several months suggest that bitcoin is sapping some demand from gold. Is that the case? The straight answer is ‘no’, since the performance of gold makes some sense without any reference to bitcoin.
A longer answer to this issue needs some discussion about the major differences between bitcoin and gold. Differences between bitcoin and gold are far more significant than any of the involved similarities. Neither is money in the only real definition of the term which is the general medium of exchange.
However, gold trades like money. It means that the demand to hold money, and therefore gold, seems to surge during ‘busts’ and fall during ‘booms.’ In most cases, a consequence is that gold normally does not do well when the stock market is surging.
How Are They Related?
On the contrary, bitcoin trades like an illiquid commodity since that is what it is. No money or majorly used currency in history has ever traded in the manner bitcoin has traded and it is reasonable to assume that none of them ever will.
The incredible surge in the price of bitcoin in the last 10 months is linked to the bubble that has formed in the stock market and the associated spectacular gains in the stock prices of the firms with which the public has become quite infatuated. Practically, Tesla (NASDAQ: TSLA) is such a firm. The chart below compares the price of Tesla shares and the bitcoin price.
At some point, bitcoin ‘bubbled’ with the stock market in 2020. It also ‘bubbled’ with the stock market in 2017 and if it had been around that time, many analysts think that might have bubbled with the stock market in 1999-2000. On the other hand, the desire to own some gold or money reduces whenever the prices of the speculative assets rocket upward in real terms.
Who will go for gold when the record shows in the last one or even ten years proves that they can do much better by acquiring QQQ (the NASDAQ100 ETF)?
The price of gold will likely start on its next intermediate-term advance at almost the time that the price of bitcoin reaches a crucial peak. That will not happen because bitcoin has been sapping demand from gold.
Instead, it will happen since a top for the bitcoin price possibly will happen at almost the same time as a top for the speculation in general and a trough in the desire to own any cash reserves.
Possibly we could be a few months away from a major peak for speculation in general. Therefore, at this time it is still better to remain long on consumable commodities and speculative assets than to go long on gold.