Prices have surged to the highest since the start of June on escalating tensions between Russia and the West over Ukraine, and a spike in U.S. inflation to the strongest in decades. At the same time, real interest rates — a key driver of gold — have jumped this year, countering the typically inverse correlation between the two. And in the battle over whether Bitcoin is a better modern-day store of value than bullion, the cryptocurrency is losing out, at least for now.
“Geopolitical risks have materialized and are escalating,” said Nicky Shiels, head of metals strategy at MKS PAMP SA, a trader and refiner of precious metals. “Gold at $2,000 is a higher probability in the near term, versus $1,800.” The metal traded around the middle of that range on Wednesday.
U.S. President Joe Biden unveiled sanctions this week targeting Russia’s sale of sovereign debt abroad and the country’s elites, after Vladimir Putin recognized two self-proclaimed separatist republics in eastern Ukraine as independent, a dramatic escalation in the standoff. Biden described the move as the start of Russia’s invasion of its neighbor, but Moscow has denied any plans to invade.
Before demand for a haven took off over Ukraine, bullion’s resilience had been a mystery to some observers, especially in the light of the Federal Reserve’s imminent tightening cycle. One concern was that the U.S. central bank could run the risk of triggering a recession by increasing rates more frequently and to a higher level than potentially needed to tame inflation.
“What’s really driving gold is a sense that the chances of a policy error are increasing with the Fed,” said Ross Norman, chief executive officer of Metals Daily, an information portal focusing on precious metals. “There’s a sense that the Fed is behind the curve, and when you have to play catch up, you have to put a fairly aggressive move forward in terms of rate-hiking, which a fragile economy may not be well positioned to adjust to.”
Gold is also benefiting from some weakening in demand for cryptocurrencies, which are often seen as an alternative “fiat hedge,” according to Peter Berezin, chief global strategist at BCA Research Inc. Bullion has gained more than 3% this year, while Bitcoin has plunged 16%.
Bullion had a largely lackluster 2021 after charging to an all-time high the year before on the back of ultra-accommodative monetary policy and pandemic support. Now, a rate liftoff is all but certain in March, and JPMorgan Chase & Co. economists estimate increases of 25 basis points at nine consecutive meetings. This could weigh on bullion, an asset that bears no interest.
“Gold traders have never lived through a rate hiking cycle amidst high inflation since the 1970s,” said Shiels from MKS PAMP. “There’s a lot of uncertainty over how this plays out: hiking cycles aren’t necessarily bearish for gold and it depends how real rates respond. At the end of the day, gold doesn’t control its own fate which is the added complexity.”
Rising global risks have not been lost on investors who’ve piled into exchange-traded funds backed by bullion. As of Feb. 18, holdings in SPDR Gold Shares had surged by slightly more than 50 tons from a 20-month low in December.
Other supportive drivers for bullion include physical demand from China and India and the possibility of undisclosed central bank purchases.
The biggest consuming countries are back in full force after an abysmal 2020. Shipments to China from Switzerland, Europe’s key refining hub, jumped almost fivefold in January to a five-year high. Imports by India accelerated to the strongest level in a decade last year as jewelry sales almost doubled, with the demand outlook remaining bright, according to the World Gold Council.
Meanwhile, central banks added 463 tons of gold to reserves last year, an increase of over 80% from a year earlier, according to the council, which added purchases will continue but at a slower pace. The central banks of Russia and China could look to buy gold in the open market and support prices when real yields spike, Citigroup Inc. said in a Feb. 17 note. “We think this has already materialized in 2022, but might not be reported in data yet,” the bank said.
Still, the question remains — can gold sustain levels around $1,900 an ounce when or if geopolitical tensions ease? UBS Group AG’s wealth management unit said in a note last week that “a break in the negative correlation between gold and U.S. real rates never really endures, and this time is no different.”
Traders Prefer Gold, Fiat Safe Havens Over Bitcoin As Russia Goes To War
Russia’s decision to wage war on Ukraine has sent shockwaves through financial markets. While equities and bitcoin are down, gold, oil, base metals, agriculture commodities and currency market safe havens like the U.S. dollar and the Japanese yen are trading higher.
Broadly speaking, markets are displaying the usual unease with geopolitical tensions. Some in the crypto community, however, may be disgruntled to see the top cryptocurrency again missing a haven bid.
Crypto pundits have long hailed the top cryptocurrency as a better inflation hedge and haven asset than gold. But price action, particularly since the influx of institutions and sophisticated players in the market after the March 2020 crash, suggests otherwise.
The cryptocurrency has moved more or less in tandem with stocks. Data tracked by South Korea-based analytics firm CryptoQuant shows bitcoin’s 60-day Pearson’s correlation coefficient with the S&P 500, Wall Street’s benchmark index, now stands at a record high of 0.56.
“BTC is getting adopted by traditional institutions,” CryptoQuant said in a Telegram chat. “It’s being owned by new players who trade stocks. Bad news: BTC is not a safe-haven asset. For now.”
It’s pretty clear institutional interest hasn’t done for bitcoin what it was supposed to do, at least in the eyes of crypto investors – that is, establish the cryptocurrency as a digital safe haven better than gold.
The fact that fiat safe havens are doing better than bitcoin perhaps indicates that the cryptocurrency market as a whole is at the far end of the risk curve. Bitcoin was a largely uncorrelated asset before the COVID-19 crash and more so during the early bull cycles when institutional participation was almost nonexistent.
A continued risk-off might push bitcoin down to $30,000, which acted as a strong support zone in January 2021 and three months to July 2021. A potential break lower would confirm a double top breakdown on the weekly chart and invite more selling pressure.
Bitcoin’s Digital Gold Luster Fades As Customary Havens Win Out
* Bitcoin Falls Along With Risk Assets As Russia Invades Ukraine * Gold Has Rallied In 2022 While Bitcoin Has Tumbled Almost 50%
Bitcoin is falling while gold is rising as investors seek traditional refuges amid the turmoil in Ukraine, undercutting the often-touted argument from advocates that the cryptocurrency is now a digital version of the long-time haven asset.
“Bitcoin is much more of a momentum and risk-driven asset than it is the independent store of value that people want it to become, it’s not there yet,” said Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter.
Gold traded as high as $1,974 on Thursday, the most since September 2020, a year marked by the onset of the Covid-19 pandemic. The largest cryptocurrency by market value, Bitcoin fell as much as 8.5% to $34,337, the lowest in about a month. It has dropped almost 50% from its all-time high in November.
“Gold is doing exactly what it should be doing right now, but it’s a much more mature asset and it’s got a proven history in these types of conflicts of how it trades,” Essaye said. “This is the first time Bitcoin has ever encountered a potentially major global conflict, and I would expect that the declines will continue as long as stocks are under pressure.”
Russia launched a full-scale attack on Ukraine Thursday. President Joseph Biden promised to imposed “severe” sanctions on the nation. The turmoil has been prompting investors to move their capital into safe havens, with gold reaching its highest peak in nearly two years. Treasuries and the dollar also strengthened.