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The correlation between Bitcoin and gold has taken a turn. Investors are currently avoiding the two assets amid increasing interest rates and a strengthening US dollar. This has hurt the values of both Bitcoin and gold.
Correlation between Bitcoin and gold reaches yearly highs
In the previous years, Bitcoin and gold remained largely uncorrelated. The correlation between Bitcoin and gold stood at negative 0.2 and positive 0.2 in the past. However, this year has seen quite a change amid turmoil in the cryptocurrency and traditional markets.
The turmoil witnessed across financial assets this year has seen some narratives weakening, such as the one of Bitcoin being the “digital gold” and a hedge against inflation. Gold is also losing its use case as a store of value. Bitcoin and gold have dropped significantly as inflation levels reach new highs.
The monetary tightening policies by global central banks have dropped Bitcoin’s price by more than 70% since reaching an all-time high in November last year. Gold has dropped by 10% on a year-to-date (YTD) scale. Several interest rate hikes in the UK have also affected the metal’s appeal.
Gold has failed to be a safe haven as inflation continues to remain high. This has caused a year-high correlation of +0.4, highlighting a change in the market structure, according to research published by Kaiko.
Investor confidence has dropped in 2022
Bitcoin has suffered notable losses this year. The world’s largest crypto is losing its status as an inflation hedge and a store of value. Bitcoin proponents have touted the asset’s fixed supply as the reason behind it being a suitable inflation hedge.
Investors currently want to indulge in low-risk assets. Experts have said that while the cryptocurrency is still new and volatile, it could be used as an inflation hedge. Moreover, the asset could also be highly profitable for middle and long-term investors.
On the positive side, the Bitcoin hash rate has been increasing amid investors accumulating more of the token. Long-term holders seem to be buying more, while the supply on exchanges is also low. The growing institutional interest in the asset could be seen as beneficial toward a potential rally for the asset.
The market should also attain peak hawkishness for gold to recover its value. The head of commodity strategy at Saxo Bank, Ole Hansen, published a recent note saying that gold and other metals such as silver and platinum would continue under pressure until the market reaches peak hawkishness.
Hansen also said that the hawkishness would likely end if the dollar squeezes out the remaining short positions. However, it remains to be seen whether the turning point will be reached before the year ends.
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