How Correlated Are Bitcoin, Gold, & US Dollar Prices?

It seems that the paradigm among some of the world’s most powerful investors is changing. JP Morgan recently declared that the rise of Bitcoin comes at the expense of gold.

But just how correlated are the prices of these two assets, and how is the US Dollar really fairing in a world that should be looking for a hedge?

The Story of the US Dollar

Both Bitcoin and gold reached nominal all-time price highs on a per unit basis in 2020. Now gold seems to be declining slightly as Bitcoin struggles to sustain its gains.

Bitcoin has done exceptionally well in 2020! Source: Coinmarketcap

In the meantime, the US Dollar is weakening against other currencies:

  • Since the beginning of the pandemic, USD money supply has increased by about 40%
  • The Fed minted 22% of all the USD in existence in 2020
  • Most major world currencies have appreciated steadily against the USD
  • These other fiat currencies seem to be holding their gains against the greenback – Except for the Japanese Yen
  • That is despite the loosening of monetary policy from major central banks
Both the Euro and the British Pound are strengthening against the USD despite the ECB adding more than a trillion EUR to the money supply this year. Source: Google

Let’s make this abundantly clear:

  • Bitcoin undoubtedly outperformed any other currency this year
  • Nevertheless, demand for USD is still surprisingly high
  • The USD has not lost as much ground as one would expect this year, given the sheer amount of greenback added to the money supply
  • Investors are now overwhelmingly switching their positions in the gold market in favor of fiat
The Yen was a safe haven early during the pandemic, then it lost ground. Now it is gaining ground against the USD again. The Canadian Dollar follows suit. Source: Google

Gold doesn’t Shine as Bright as you Think

Despite the current USD weakness and that of other fiat alternatives, gold doesn’t seem to shine as bright as you think:

  • Gold prices peaked at $2,074 USD in August and has since declined
  • The price per ounce of gold is currently at $1,839 USD, about 11.5% below its all-time high
  • That is a nominal all time high
  • Gold’s previous all-time high price was around $1,900 USD per ounce in 2011
Gold seems to shine for brief periods of time. Taking advantage of those shifts can net you more BTC! Source: Goldprice.org

Gold reacted negatively to an increase in the supply of USD since August. Furthermore, an inflation adjusted all-time high considering inflation of 2% per year since 2011, would require gold prices to jump above the $2,300 USD per ounce mark.

Here Comes Bitcoin?

Anyone who held BTC instead of gold from 2011 up until today, would not only be orders of magnitude richer. They would have also managed to beat inflation handily, unlike gold holders.

If you could conceptualize how Bitcoin should look like to any investor, you would pick this oasis in the middle of the desert to convey the idea!

Nevertheless, Bitcoin prices are not looking too good now considering the sheer amount of US Dollars that flooded the market earlier this year:

  • BTC prices rose above its previous nominal all-time high on several exchanges this year
  • That price is still below Bitcoin’s inflation-adjusted all-time high
  • Over the past 2 weeks, BTC prices stagnated and have lost a little ground
  • Albeit not as much as gold – BTC is down by about 4% from its year to date high

Are These Assets Correlated at All?

Nevertheless, that correlation is weak to non-existent if you look at the price of both assets in the last few years.

This Trading Economics USD supply chart paints a clear picture. Take a look at US economic production/output and population growth to understand the magnitude of the inflationary pressure.

The real question here is how the prices of both assets correlate to the US Dollar:

  • How is it possible for Bitcoin to lose ground as more mainstream and corporate investors declare they will pour more money into the asset?
  • Why are investors really getting out of gold?
  • Is it possible that the world can’t have enough US Dollars?

All these questions are relevant to your own strategy going forward. Just keep the following in mind:

  • Bitcoin seems to be decoupled from both gold and the US Dollar
  • Investors who are ditching gold are not necessarily flocking to BTC
  • Consider stagnating Bitcoin prices within the following context: BTC is currently worth about 3% of gold markets
  • In the meantime, the world prefers the US Dollar to any other fiat alternative; it has a psychological advantage
  • That is somewhat extending to Bitcoin and gold markets

Hi, my Name is Generic Investor, and I am a Fiat Addict!

The endgame of most investors out there, is to have more fiat. That is despite the fact that the Fed and other central banks are adding record amounts of it to the money supply.

If you must have fiat, consider the Swiss Franc: Switzerland is a highly productive country with a history of military neutrality and declining public debt as a percentage of GDP.

That leads us to believe that there is not correlation between the market for US Dollars, gold, and Bitcoin. The world is still addicted to fiat despite its flaws. Demand for traditional money is stronger than fears of escalating inflation mainly because we are in the midst of a war of narratives.

Which one is the better kind of money and the asset that will prevail? You know our answer, but that doesn’t mean enough people share our opinion, yet!