Is Bitcoin Influencing Demand for Gold?
Despite being a non-correlated asset, bitcoin’s influence on the broader financial system is only now starting to be understood. According to Jan Van Eck, CEO of VanEck Associates, demand for bitcoin could partly explain gold’s price behavior over the past two-and-a-half years.
Bitcoin and Gold: Demand Drivers
Bitcoin’s year-long bear market may have shined the spotlight back on gold, a traditional safe play for investors fleeing economic and political instability. According to Jan Van Eck, bitcoin’s rapid ascent in 2017 had a direct impact on gold demand. Conversely, demand has gone the other way now that bitcoin is approaching its longest bear market in history.
“I do think that bitcoin pulled a little bit of demand away from gold last … in 2017,” Van Eck told CNBC on Wednesday. “Interestingly, we just polled 4,000 bitcoin investors and their number one investment for 2019 is actually gold. So gold lost to bitcoin and now it’s going the other way.”
The last great bull market for gold occurred after the financial crisis and peaked in 2011 when prices cracked $1,900 a troy ounce. Since then, bullion has mostly floundered as record-low interest rates fueled demand for stocks and other risk-on assets. The emergence of bitcoin as “digital gold” with unlimited growth potential also appears to have undermined the traditional asset.
Bitcoin’s precipitous drop over the past two 12 months has been well documented, but comparing its performance relative to gold yields important insights on the so-called ‘battle of the safe havens.’
In the 12 months through December 2017, bitcoin gained a whopping 1,850%. Over the same period, bullion rose roughly 4%. Since peaking above $19,500, bitcoin has tumbled 82%. During that same stretch, gold is up 2.5%. While gold’s fluctuations don’t seem like much, crypto traders are reminded that 25-fold increases are not the norm in traditional markets, nor is the extreme level of volatility exhibited by bitcoin and its altcoin peers.
Demand for gold has picked up recently. The April futures contract spiked 1.4% on Friday to $1,304.20 a troy ounce, the highest in eight months. Since October, gold has rallied more than 9%. Bitcoin has plunged 45% over the same stretch.
Of course, it’s still too early to determine if demand for bitcoin has a direct influence on gold (or vice versa). It could be that bitcoin follows a similar trajectory as gold over the long run, which could support the view that it is developing safe haven characteristics.
Back in September, Twitter user Nunya Bizniz identified an “uncanny pattern resemblance” between gold and bitcoin. In two charts, the user compared gold’s performance in the last 43 years with that of bitcoin during the first nine years of its inception.
The original tweet:
BTC vs Gold (Both Log Scale) Uncanny pattern resemblence between Golds 43 years of chart data and Bitcoins 9 years. pic.twitter.com/jtJ4qWqAFC
— Nunya Bizniz (@Pladizow) September 6, 2018
Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.