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Is Bitcoin Pushing Out Gold?

Bitcoin Emerges as a Hedge Against Inflation

The price of bitcoin has almost doubled since the beginning of the year, while gold has fallen by almost 15%. Cryptocurrency has emerged as a competitor to gold as a hedge against inflation, that is, a protection against depreciation. Gold is often used as such a hedge: when the US dollar loses value due to inflation, the price of gold tends to increase. The CME Market Sentiment Meter (MSM) has revealed a shift in trader sentiments about the price of gold futures. There is an emerging school of thought that attributes this shift to the recent surge in the price of bitcoin.

“The CME Market Sentiment Meter has revealed a shift in trader sentiments about the price of gold futures. There is an emerging school of thought that attributes this shift to the recent surge in the price of bitcoin.”

Putting Numbers to Market Sentiment

A shift in trader sentiments has been revealed by the MSM about the price of gold futures. In mid-February, the risk–return distribution in the figure below went from a Balanced to a Conflicted state. The Balanced state is the most common, indicating a normal level of market anxiety, and is characterized by a bell-shaped curve.

 
 

On February 16, there was a sudden shift to the Conflicted state—indicating a price gap anxiety. Some traders expect the price of gold futures to fall, while others expect it to rise.

The MSM Can Account for Multiple Schools of Thought

This shift in market sentiment can be attributed to two different schools of thought. The first is that traders expect the price of gold to increase with inflation. There has been a continued rise in the US 10-year Treasury yield, increasing from 0.93 at the start of the year to 1.72 on March 30. The 10-year bond is a popular benchmark, where the yield tends to climb with inflation.

Other traders expect the price of gold to decrease, which is likely due to the recent surge in the price of bitcoin. The figure below shows the prices of bitcoin and COMEX gold futures, relative to their respective prices on January 4.

 
 

As of March 30, bitcoin had reached almost 190% of its January 4 price, while gold had fallen by 13.5%. Bitcoin has a finite supply that is not influenced by the price of bitcoin itself. The value of bitcoin may grow without major changes to its supply, allowing it to avoid major inflation—unlike traditional currencies, which may see large changes in their supply. An asset growing in popularity and value, bitcoin can be seen as a protection against inflation that is competing with gold.

Time will tell where the prices of gold and bitcoin will go, and whether both assets are used as hedges against inflation in the future. The MSM is able to analyze the interplay between different assets—such as gold and bitcoin—and inflation because it can put numbers to multiple schools of thought, revealing a more complete picture of market sentiment.

A wealth of insight on both Gold and US 10-Year Treasury Note futures in the form of clear time-series data is available via the MSM. Visit the 1QBit MSM page for more information.

For further reading on the subject, see these articles:

1. What Higher Inflation Might Really Mean for Investors
2. Gold and Silver’s Supply-Side Impact on Prices
 

To set up a free trial of the MSM, contact msmsales@1qbit.com.

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