Bitcoin and gold recorded strong performances in 2023 amid geopolitical uncertainties and rising interest rates.
The correlation between Bitcoin and gold has always attracted interest and debate within financial circles. While both assets are considered stores of value, they display different characteristics and are mostly influenced by unique market factors. Generally, investors have viewed Bitcoin and gold as hedges against different economic uncertainties and inflation. That hedging factor leads to periods of positive correlation between these assets.
Nevertheless, this correlation is not constant, and sometimes, their price movements diverge extensively. Bitcoin, since it is still a new and highly volatile asset, has displayed a higher degree of price fluctuation compared to traditional gold.
Investors mostly monitor the correlation that exists between Bitcoin and gold as part of their risk management and portfolio diversification approaches, recognizing the available benefits and challenges linked to these two unique yet interconnected stores of value in the current financial landscape.
Interestingly, the correlation between Bitcoin and gold increased in 2023, as shown by a recent report from asset manager Fidelity.
Based on the information published by Fidelity, Bitcoin’s price decoupled from its previously inverse relationship with interest rates and even managed to rally despite global rates surging across the world – high-interest rates seem to lower the demand for risk assets. In the past 12 months, gold prices have followed a similar pattern.
“But this past year, we saw a complete decoupling of this relationship as real rates continued to rise (with inflation subsiding and treasury yields screaming higher at one of the fastest paces in history), with bitcoin not only holding steady but then rallying! Could this be due to an idiosyncratic event, such as the anticipation of a spot ETP? Perhaps. But we do not think so, because gold has also been showing similar behaviors recently.”
Related: We talk to William Cai of Wilshire Phoenix About Bitcoin and Gold
Gold And Bitcoin Performance In 2023
In the past year, gold recorded considerable fluctuations, but generally showed strong performance against several major currencies. Over the year, the performance of gold in US dollars increased by 14.6% with significant variations among various currency pairs. The asset performance was mainly driven by geopolitical risks and central banks’ demand. In the meantime, Bitcoin gained a staggering 156% in 2023.
In that context, Fidelity noted:
“Historically, bitcoin has been relatively noncorrelated to gold over the longer term, but recently has shown an increase in correlation as both have rallied.”
The investment firm speculated on the reasons for the increased correlation between the commodities, saying that investors might be watching the United States’ growing fiscal deficit or even expecting some change in interest rates.
“We can only speculate as to what these real asset markets may be saying, but one possible explanation is that both Bitcoin and gold are saying that the bond market may be wrong or that both assets are sniffing something else out, such as the United States’ increasingly large and structural fiscal deficits.
Perhaps the bitcoin market may be anticipating more debt monetization by the Federal Reserve in the future, or anticipating rate cuts, given that our research shows that Bitcoin’s price is highly correlated not to consumer price inflation, but rather inflation in the money supply itself and various liquidity metrics.”
Fidelity’s analysis also highlights a tighter supply environment for Bitcoin, as the amount of long-term holders has increased to reach another all-time high of 70%.
“It appears to us that the last few years of the bear market have forged some very strong hands in terms of holding period. Even in the face of a 160%+ rally in Bitcoin (at the time of writing in mid-December), we have not observed these long-term and illiquid coins moving in response to the price to take profit.”
Conclusion
The year 2023 recorded a significant increase in the correlation between Bitcoin and gold, as highlighted by asset manager Fidelity. Despite the historical expectations of an inverse relationship, both assets showed strong performances, with Bitcoin surging by a remarkable 156%, while gold showed fluctuations but ended 2023 with a 14.6% increase in US dollars.
