Is Bitcoin Stealing Gold’s Thunder?

The notion that bitcoin is stealing gold’s thunder is trendy.  A number of financial pundits have noticed that gold prices have been weak since August, while bitcoin has soared.  Assuming that what’s making headlines is what’s truly fundamental, and assuming correlation equals causation, it’s tempting to jump to the easy conclusion that the popularity of bitcoin explains the bearish action in gold.

Trendy, but fanciful.  The evidence does not support it. For starters, gold has been behaving just as Synthetic Systems forecast it would.  Please see the forecast charts under Market Analysis on the site menu.  Direct link here:  Quarterly Charts  These are the market forecasts generated by my quant model for each of the past five quarters.  

The forecast generated in the middle of last year (2020.50), while gold was still rising, clearly shows a declining trend in the fourth quarter of last year and the first quarter of this year.  Even the chart generated at the beginning of last year (2020.00) – before the corona crash – correctly forecast gold rising into the third quarter of this year and declining thereafter.  And Synthetic Systems knows nothing about bitcoin.  Gold was simply due to decline.

You don’t have to take my word for it that Synthetic Systems doesn’t know anything about bitcoin.  Gold is behaving just as one would expect simply given the behavior of the Treasury market.  Gold is widely known to negatively correlate with real interest rates.  And not just over a quarter or two, but over years.  What’s more, there’s good reason for it.

Although we don’t have a reliable measure of real interest rates, over most time frames changes in nominal rates track pretty well.  More directly, gold prices usually correlate well with Treasury prices, an apples-to-apples comparison.  Long term Treasury prices are most easily observed with a Treasury index fund like VGLT.  Pull up a chart, and compare it with a chart of a gold index fund like IAU.  The correlation is unmistakable.  Treasury prices peaked around July 30.  Gold peaked only a few days later around August 5.  

This is the proverbial smoking gun.  Investors flock to gold when they fear Treasury prices are too high (yields too low) to compensate for inflation.  Soaring Treasury prices in early 2020 led to soaring gold prices.  When Treasuries began to come back to earth, interest in gold followed.  Bitcoin, in contrast, tends to track the patterns of tech stocks, reflecting investors’ infatuation with tech.

So there we have it.  Gold has been dancing to the bond market’s tune.  Digital tulips have nothing to do with it.