Gold and Bitcoin Break Out
Contributed Opinion

On Sunday evening, spot gold prices surged to an all-time high north of $2,150. That capped a 16.5% rally since the start of the year. At the same time, the unit price of the world's largest cryptocurrency, Bitcoin (BTC), tapped $42,000 for the first time in nearly 20 months. That put Bitcoin's year-to-date return at more than 153.0%.

Though BTC has obviously risen more steeply than gold throughout the year, due to its more volatile nature, its price appreciation has followed similar trajectories. MRP has long posited that gold and Bitcoin could very well be complementary assets in some situations, sharing very similar monetary qualities and the potential to benefit from similar trends. Earlier this year, BlackRock CEO Larry Fink lent credence to the "digital gold" narrative, stating that Bitcoin is "digitalizing gold" and "could revolutionize finance." This was a massive stamp of legitimacy, considering BlackRock is the world's largest asset manager, responsible for $9 trillion AUM in Q1 2023.

Fink went on to add that "Instead of investing in gold as a hedge against inflation, a hedge against the onerous problems of any one country, or the devaluation of your currency whatever country you're in — let's be clear, Bitcoin is an international asset, it's not based on any one currency and so it can represent an asset that people can play as an alternative." BlackRock is one of the asset managers currently in the running to launch the U.S.'s first spot-backed Bitcoin ETF, a race that MRP has highlighted in detail throughout this year.

One example of the Bitcoin-gold relationship played out earlier this year during the U.S. banking panic that played out between March and May — culminating in three of the four largest bank failures in U.S. history. As trust was lost in banks throughout that period, investors apparently poured assets into Bitcoin and Gold to store their value and keep it remote from the next potential bank collapse. These commodities' values shift constantly in Dollar terms, but both are always fungible — one unit of either Bitcoin or Gold is always equal to another unit of the asset. If investors take custody of their gold or BTC, they can eliminate the counterparty risk that a bank may pose since Bitcoin is always stored on an immutable blockchain ledger, and physical gold can be stored securely as well.

Ownership of Bitcoin does not take the form of an IOU like a bank account; it is a cryptographically-secured bearer asset that can be stored in any amount at little to no marginal cost. It can be sent anywhere on the network across the world at any time with full settlement in minutes. Portability and infinitely scalable storage is one advantage that Bitcoin carries over gold, as the costs to securely move or store BTC does not increase based on the amount of the asset that is being transferred.

Essentially, because Bitcoin has no mass, one BTC or one million BTC can be moved with identical speed and security and at the same low cost. Obviously, storing or transferring one million ounces of gold (equivalent to 62,500 pounds of mass) relative to one ounce would incur much greater costs and risks.

Another key difference that MRP has previously highlighted relates to the nature of scarcity: The gold miners' resources are relatively scarce, whereas the Bitcoin miners' resources are absolutely scarce. Though there is some feasible limit to how much gold there is in the world, nobody knows where that limit actually is, given each individual's necklace or gold stash can't be accounted for and new, previously unknown deposits are discovered semi-regularly.

In June 2022, for instance, Reuters reported about 31 million tonnes of gold ore were newly discovered in Uganda, with up to 320,158 tonnes of refined gold being extractable. That is a significant development for the long-term supply of gold, considering this discovery alone could potentially yield 53.3% more gold than all of the gold mined throughout history, which the World Gold Council pegged at 208,874 tonnes. Again, that is only an estimate, and nobody can feasibly calculate how much gold has actually been produced and is in circulating supply. This is not the case with Bitcoin. Not only can it be known with absolute certainty that there will only ever be 21 million BTC mined, but it can also be easily verified that as of 12:30 pm UTC on December 4, 2023, there were exactly 19,560,881 BTC in circulating supply.

The difference in relative and absolute scarcity also plays out in how much new supply of each resource is produced. The primary driver of gold output will be the market price. Simply put, when gold prices rise, gold miners will typically accelerate the production of gold to sell more at a higher price. The issue for miners is that the introduction of greater supply at an accelerated pace will likely be one of the factors that end up extinguishing the higher prices that were created by strong demand conditions. This same scenario could be projected onto the producers of copper, wheat, oil, and many other commodities. The issuance of Bitcoin, on the other hand, is programmatic and not controlled by any suppliers. Rather, it is controlled by a network protocol and mathematics that dictate an immutable schedule of distribution.

The similar trajectory that Bitcoin and gold have followed recently is largely related to shifting monetary policy at the Federal Reserve and its impact on the U.S. Dollar (USD), which traditionally correlates inversely with both of the commodities. In particular, the Fed's series of rate hikes that have sent the upper limit of the benchmark Fed Funds rate to its highest level in over two decades appears to have come to an end. In fact, CME's FedWatch suggests that rate cuts are now being priced in by futures traders as soon as March.

According to FedWatch data, there is now a 59.8% probability that at least one rate cut will trim 25bps from the benchmark overnight rate by March. A halting, or even a reversal, of the hikes that have helped the Fed tighten monetary policy in the U.S. would have a significant impact on USD's value relative to other currencies. When interest rates rise in the U.S., the higher yields can attract investment capital from investors abroad who exchange assets in non-USD currencies for Dollar-denominated investments. This demand, in turn, raises the value of the Dollar compared to other currencies. In a similar way, if rates are to hold steady or even begin to fall, that can cut the appeal of the Dollar.

It was all the way back in our August 2022 Viewpoint, The FX Timebomb, that MRP noted the Dollar was likely on the verge of a downturn, as the Fed was rapidly approaching what we termed "peak hawkishness"; the point at which rate hikes reached their maximum size and frequency. We wagered, from that point on, the central bank's rate hike regime would gradually reduce the size of rate hikes from 75bps at their largest to 50bps and then, eventually, just 25bps.

Further, these hikes would become less frequent until they ceased altogether — likely the state of affairs we have now reached with just one hike in the past four FOMC meetings. The U.S. Dollar Index (DXY) hit a more than 20-year high north of 114.0 that September, prior to retreating. Though we did witness a rebound in the Dollar from lows under 100.00 earlier this year, it has not gotten anywhere near its 2022 high and now sits near 103.5 as of this morning.

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