LD Capital: Gold and BTC

BTC, often referred to as “digital gold,” is frequently compared by traders to the NASDAQ index as a key reference for BTC price changes. Gold and the NASDAQ index respectively represent typical safe-haven and risk assets, which seems contradictory. This article will explore whether BTC belongs to the category of safe-haven assets by examining the factors influencing the prices of BTC and gold.

I. Overview of Gold and BTC

1.Gold

Unit of Measurement

• The “ounce” is the internationally accepted unit of measurement for gold, where 1 troy ounce = 1.0971428 avoirdupois ounces = 31.1034768 grams.

Gold Purity

Purity refers to the metal’s fineness, generally expressed in thousandths or denoted by “karat” or “K.” Gold purity can be divided into 24 “karats.” Each karat (abbreviated as “k” from the English “carat” and German “karat”) represents 4.166% gold content. The gold content of various karats are as follows:
8k=33.328% (333‰)

9k=37.494% (375‰)

10k=41.660% (417‰)

12k=49.992% (500‰)

14k=58.324% (583‰)

18k=74.998% (750‰)

20k=83.320% (833‰)

21k=87.486% (875‰)

22k=91.652% (916‰)

• 24k=99.984% (999‰)

For example, the standard delivery object for London gold is a 400-ounce gold bar with a gold content of no less than 99.50%. The Shanghai Gold Exchange offers various delivery varieties such as Au99.99, Au99.95, Au99.5, Au50g, and Au100g.

Total Market Value of Gold

• According to the World Gold Council, approximately 209,000 tons of gold have been mined, valued at about $12 trillion. About two-thirds of this was mined after 1950. If all the existing gold were stacked together, it would form a pure gold cube with a side length of 22 meters (or 73 feet). Gold in jewelry form accounts for about 46% of the total (approximately 95,547 tons, valued at $6 trillion); central banks hold 17% (approximately 35,715 tons, valued at $2 trillion); gold in bars and coins constitutes about 21% (approximately 43,044 tons, valued at $3 trillion); gold-backed ETFs account for about 2% (approximately 3,473 tons, valued at $0.2 trillion); the remaining is used for various industrial purposes or held by other financial institutions, accounting for about 15% (approximately 31,096 tons, valued at $2 trillion).

Gold Trading Volume

Gold is one of the world’s most liquid assets, with a daily average trading volume of $131.6 billion in 2022. The main trading venues include the London OTC market, the U.S. futures market, and the Chinese market. The London OTC market, established in 1919, is a gold spot OTC market and the center of gold trading. The London Bullion Market Association (LBMA) generates two gold reference prices daily (at 10:30 AM and 3:00 PM London time) as benchmarks for market participants; the COMEX gold market in New York is currently the world’s largest gold futures market; the Shanghai Gold Exchange (SGE), which opened on October 30, 2002, provides a spot trading platform for the Chinese gold market; the Shanghai Futures Exchange (SHFE) complements the SGE’s spot trading with futures transactions.

Average Daily Trading Volume of Gold (in billions of U.S. dollars)

2、BTC

The 24-hour trading volume of BTC is approximately $24 billion, with most of the volume occurring in perpetual contracts. Recently, the daily average trading volume of BTC has increased significantly, reaching about 15% of gold’s volume (previously less than 10%). The largest trading venues for both spot and perpetual contracts are on Binance. The current total market value of BTC is $677.7 billion, about 5.6% of the total market value of gold.

II. Price Influencing Factors for Gold and BTC

1.Supply and Demand

• Gold
  • Supply: The global annual increase in gold supply has been relatively stable, maintaining around 4,800 tons from 2016 to 2022. Since gold does not easily deteriorate, the gold used in consumer areas still exists in some form and can re-enter the supply through recycling. Therefore, gold supply comes from both mining and recycling. In 2022, the total amount of recycled gold was 1,140.6 tons, and the total mine production was 3,626.6 tons, with about three-quarters of the supply coming from mining and one-quarter from gold recycling. As the graph below shows, the supply of gold has been stable over the years, with no significant trend fluctuations, thus having a minimal impact on prices.

Demand

The total global gold demand in 2022 was 4,712.5 tons. In the first half of 2023, global gold demand reached 2,460 tons, a 5% increase year-over-year. The demand for gold includes jewelry, medical technology, investment needs, and central bank reserves. In 2022, the gold demand for jewelry manufacturing, technology, investment, and central banks were 2,195.4 tons, 308.7 tons, 1,126.8 tons, and 1,081.6 tons, respectively. Jewelry manufacturing accounted for the largest share at 47%, while central bank demand accounted for 23%. Influenced by traditional cultures, China and India are the world’s largest consumers of gold jewelry, accounting for 23% of global gold jewelry demand in 2022.

Gold is a vital component of central bank reserves worldwide, with significant variation in the proportion of gold in central bank reserves across different countries and regions. For instance, the United States and Germany hold close to 70% of their reserves in gold, while Mainland China has only 3.8%, and Japan 4.2%. The outbreak of the Russia-Ukraine conflict and the subsequent freezing of Russia’s dollar-denominated central bank reserves by the U.S. and Europe shook confidence in the dollar’s safety among non-U.S. economies. This led to a growing demand for diversifying foreign exchange reserves, with a shift towards increasing gold reserves. As the trend towards de-dollarization progresses in the future, it will become increasingly evident that central banks globally are systematically increasing their gold reserves. The top twenty countries/organizations in global gold reserves are sourced from the World Gold Council.

Top 20 Countries/Organizations in Global Gold Reserves

Source: World Gold Council

According to data from the World Gold Council, central banks’ demand for gold surged dramatically in the second half of 2022, totaling 840.6 tons, which is 1.8 times the total amount for the entire year of 2021. In the first half of this year, central banks’ demand for gold, though lower than in the second half of last year, reached 387 tons, setting a new high since the statistic was recorded in 2000. Turkey, due to political instability, experienced a strong domestic demand for gold. The government temporarily banned the import of some gold bars and sold gold to the domestic market, which does not represent a long-term strategic shift in Turkey’s gold strategy. Overall, Turkey’s gold sales in the second quarter did not weaken the overall positive trend in central bank gold demand. Mainland China was the largest gold purchaser, buying 57.85 tons and 45.1 tons in the first and second quarters, respectively. As of October 13, China’s gold reserves stood at 70.46 million ounces, an increase of 840,000 ounces month-on-month, marking the 11th consecutive month of increase. Over the past 11 months, the People’s Bank of China’s gold reserves have accumulated an increase of 7.82 million ounces. Historically, the People’s Bank of China’s gold purchases have been strategic, with almost no sales.

BTC

The total supply of BTC (Bitcoin) is fixed at 21 million coins, with the current circulation being about 19.51 million, accounting for approximately 90% of the total supply.

The current inflation rate of BTC is around 1.75%, which is close to the annual inflation rate of gold at about 2%. Due to the halving mechanism of Bitcoin, its future inflation rate will be significantly lower than that of gold. The most recent halving in 2020 reduced the number of bitcoins issued per block from 12.5 to 6.25, with the next halving expected at the end of April 2024. The demand for BTC is divided into transaction fees and investment demand. For most of this year, BTC consumed about 20–30 BTC per day in transaction fees, roughly estimated to be about 10,000 BTC per year, accounting for 0.5% of the total circulation. The remaining demand comes from investment or speculation.

2、macroeconomic

In the macroeconomic environment, from the collapse of the Bretton Woods system to around 2000, inflation expectations and demand for safe-haven assets were the main determinants of gold prices. In 2004, the introduction of gold ETFs and the expansion of gold-related trading markets enhanced the financial attributes of gold, making real interest rates and the U.S. dollar index important factors affecting gold prices. Theoretically, gold prices tend to be inversely correlated with the value of the U.S. dollar. When the dollar rises, gold becomes more expensive relative to its own price, putting downward pressure on gold prices. From another perspective, in the long-term view, following the collapse of the Bretton Woods system and the decoupling of the dollar from the gold standard, gold essentially became a hedge against credit currencies (mainly the U.S. dollar). The stronger the dollar’s credit, the lower the value of gold allocation, and vice versa. Periods when gold and the U.S. dollar rose simultaneously are usually accompanied by oil crises, subprime crises, debt crises, and other geopolitical or economic shocks, significantly heightening market caution and safe-haven sentiment. Historically, gold yields have been positive 80% of the time in the 12 months following a peak in the U.S. dollar index (average return +14%, median return +16%).

From the fourth quarter of 2022 to early 2023, the real yield on U.S. 10-year Treasury bonds remained volatile without significant fluctuations, but gold prices rose from a low of about $1,600 to $2,000 per ounce, deviating from the restraint of U.S. long-term yields. From October 2022 to January 2023, due to expectations of economic recovery following China’s easing of pandemic measures and a rebound in the European economy, growth momentum outside the U.S. was stronger, causing the DXY to fall nearly 9%, with gold mainly following the rise in the DXY during this period.

Real Yield of U.S. Treasury Bonds

Gold is a non-interest-bearing asset, while the U.S. dollar is an interest-bearing asset. The U.S. real interest rate (nominal rate - inflation expectations) is the opportunity cost of holding gold. Theoretically, the two have a negative correlation. From another perspective, the U.S. real interest rate represents the real return rate achievable within the U.S. dollar system, serving as an indicator to measure the strength of the dollar’s credit. Both the U.S. dollar index and real yields on U.S. Treasury bonds can be used to explain movements in gold prices, with their correlation to gold varying at different times. Since the 21st century, except for the period before 2005, gold prices have been significantly negatively correlated with the real yield on U.S. 10-year Treasury bonds for most of the time, with the real yield on U.S. bonds dominating gold prices for a longer period than the U.S. dollar index. It can be said that real interest rates are the most important factor affecting long-term gold prices.

Since 2022, the sensitivity of gold prices to real interest rates has declined. As U.S. real bond yields rose rapidly, the decline in gold prices was less than historically, reflecting good resilience. Neither real yield nor the U.S. dollar index can fully explain gold price movements during this period, likely mainly related to the central bank gold buying frenzy that started in the second half of 2022. The World Gold Council reported on October 9 that the total annual gold reserves of central banks worldwide will maintain strong growth, with global central bank gold reserves increasing by 77 tons in August, up 38% from July, indicating possible structural changes in the demand side of the gold market.

3、Geopolitical

Geopolitical events such as the so-called “buy gold in times of chaos” mean that the outbreak of geopolitical conflicts increases the demand for safe-haven assets, stimulating a rapid short-term rise in gold prices. For instance, after the Russia-Ukraine and Israel-Palestine conflicts in 2022, gold prices rose to near $2,000 per ounce, which the U.S. real yield and dollar failed to explain.

Asset Price Changes After the Russia-Ukraine War

On February 24, 2022, Russian President Vladimir Putin announced a military operation aimed at the “demilitarization and denazification” of Ukraine, stating that Russian forces had no plans to occupy Ukrainian territory and supported the self-determination of the Ukrainian people. Minutes after Putin’s speech, Russian forces launched cruise and ballistic missiles at military bases and airports in Kyiv, Kharkiv, and Dnipro, destroying the headquarters of the Ukrainian National Guard. The Russian military then launched attacks on Ukrainian-controlled areas of Luhansk, Sumy, Kharkiv, Chernihiv, and Zhytomyr, and conducted large-scale amphibious landings in the southern Ukrainian cities of Mariupol and Odessa. Between February 25 and March 8, gold prices rose by about 8%. Bitcoin (BTC) did not show significant fluctuations in the first few days after the war but surged by 15% on March 1, only to fall back to its pre-surge level. By March 8, when gold peaked, BTC was priced at $38,733, a 4% increase from before the conflict, while the Nasdaq index fell about 1.5%.

From March 9 to the end of March, as Western countries announced sanctions against Russia and the market anticipated the worst-case scenario, gold prices fell from their historical high. BTC and the Nasdaq index, after a few days of fluctuations, began to rise together from March 14, with gold prices remaining stable. By the end of March, BTC had risen by 20%, gold had narrowed its gains to 2% (compared to February 24), and the Nasdaq had risen by 6%. In April, with the Federal Reserve’s interest rate hikes, the impact of the Russia-Ukraine war on asset prices began to wane, shifting the trading logic to the Fed’s rate hikes.

In April, accompanied by interest rate hikes, BTC and the Nasdaq index began a longer period of decline, and gold prices, after a brief rise, entered a long downward phase starting April 19. The Nasdaq index bottomed out around 10,000 points in October 2022, a cumulative drop of 28% since the start of rate hikes; gold bottomed out at $1,615 in September and October, a cumulative drop of 16%; and BTC bottomed out around $16,000 in November, a cumulative drop of 66%.

After reaching the bottom, gold was the first to start a new round of market growth, continuously rising from early November, with a high point on May 4, 2023, at $2,072, a 28% increase from its low. BTC and the Nasdaq index started their market growth two months later than gold. In 2023, BTC and the Nasdaq index once again synchronized their rise, reaching their high points in mid-July. BTC peaked around $31,500, nearly doubling from its low, and the Nasdaq peaked at 14,446, a 44% increase from its low. This wave of increases was mainly related to the peak in U.S. bond yields in early November, driven by the downward trend in U.S. bond yields since early November, following the unexpected decline in October CPI and core CPI data, as well as a further deepening of the inversion of the 10Y-2Y U.S. bond yield spread, reflecting a significant downward revision of market expectations for the economy and inflation. The peak and subsequent decline of the U.S. CPI and core CPI drove the 10-year U.S. Treasury yield to peak and decline, also causing the Federal Reserve to slow its pace of interest rate hikes. Later, due to the artificial intelligence boom in the Nasdaq, gold and BTC also had their independent narratives, further driving their prices higher.

Overall, since the Russian-Ukrainian conflict, BTC’s price synchronization with gold suggests that BTC has not shown strong safe-haven properties.

Asset Price Changes Since the Israeli-Palestinian Conflict

In the early hours of October 7, 2023, the Palestinian Islamic Resistance Movement (Hamas) launched “Operation Al-Aqsa Flood,” firing more than 5,000 rockets into Israel in a short period, and thousands of militants entered Israel from the Gaza Strip to engage in conflict with the Israeli military. Israel subsequently launched multiple airstrikes on the Gaza Strip, and Israeli Prime Minister Netanyahu declared Israel in a “state of war,” vowing to deploy all military forces to destroy Hamas. Gold was the most noticeably rising asset since the conflict, rising from $1,832 on October 9 to nearly $2,000 on October 26, an increase of about 8%, coincidentally consistent with the increase during the Russian-Ukrainian conflict. BTC fell from $28,000 to $26,770 between October 7 and 13, a 4.4% drop, but rebounded from the 13th, experiencing a significant surge and pullback on the 16th after a false report of BlackRock’s BTC ETF approval, closing with a half-gain to $28,546. The ETF approval speculation continued, and by the 25th, BTC had risen to $34,183. The Nasdaq saw a slight rise from October 9 to 11, then began to fall from the 12th, dropping from 13,672 points to 12,5956 on October 20.

The trends of BTC and the Nasdaq were almost completely opposite during this period, suggesting that BTC still does not exhibit safe-haven asset properties, and its subsequent rebound was due to renewed confidence in the approval of a BTC spot ETF after the SEC did not appeal against the Grayscale Bitcoin Trust case.

III. Is BTC a Safe-Haven Asset?

BTC shares a high degree of similarity with gold in terms of supply and demand, inflation, and other aspects. From its model design and logic, BTC should possess safe-haven properties. As Arthur Hayes elaborated in his article “For the War,” war leads to severe inflation, and a common method for ordinary citizens to protect their wealth is to choose gold, a hard currency. However, in the event of a large-scale war on domestic soil, governments may prohibit private ownership of precious metals, restrict their trade, or even force gold owners to sell their gold to the government at a low price. Holding strong currencies would also be subject to strict capital controls. Unlike gold, the value and transfer network of Bitcoin are not dependent on government-sanctioned banking institutions and have no physical presence, allowing ordinary people to carry it anywhere without restrictions. In actual wartime scenarios, BTC is, in fact, a superior asset to gold and strong currencies.

However, so far, BTC has not shown obvious safe-haven properties in its actual price performance.

It’s beneficial to supplement this with asset price changes prior to the recent U.S. dollar tide and the Russia-Ukraine conflict to better understand the movements of various assets in a complete cycle. The outbreak of COVID-19 in early 2020 led to a rapid drop in inflation expectations, forcing the Federal Reserve to drastically cut interest rates to 0-0.25% and start unlimited QE in late March 2020. Asset prices collectively rose; gold’s price increased the fastest, reaching a historic high of $2075 per ounce in August 2020 in London, before starting to retract. The NASDAQ rose 144% from 6631 on March 30, 2020, to 16212 on November 21, 2021; BTC rose 757% from $6850 to $58716 in the same period.

Since 2020, with the entry of traditional funds, BTC’s price has increasingly shown characteristics of a major asset class. During this period, BTC’s price fluctuations were more in line with NASDAQ’s trends. In contrast, gold’s price performance is believed to reflect its function as a safe-haven asset during the pandemic, with the spread of pandemic panic and concerns about severe economic downturns, along with actual interest rates, driving gold prices up. Additionally, the pandemic caused multiple obstacles in gold transportation, prompting a rapid increase in its price.

We can see that whether from the perspective of the long cycle of the rise and fall of the U.S. dollar tide, or from the short-term conflicts of geopolitics, BTC has not shown obvious safe-haven properties, but rather a higher correlation with the NASDAQ index. It is important to note that gold, often seen as a safe-haven asset, has shown a strong financial attribute in its price performance over large cycles and has maintained a price trend in the same direction as the NASDAQ index over longer periods, influenced by interest rates.

IV. Future Trends Outlook

In October, several Federal Reserve officials made dovish statements. For example, the previously hawkish Dallas Fed President Logan stated that the rise in U.S. Treasury yields might reduce the necessity of rate hikes. Federal Reserve Vice-Chair Jefferson mentioned that recent bond yield increases leading to tighter financial conditions would be considered in future monetary policy decisions. On Thursday, October 19, Fed Chair Powell suggested in a speech at the New York Economic Club that if recent efforts to reduce inflation continue to progress, the rise in long-term U.S. Treasury yields might lead the central bank to pause rate hikes at its next meeting. However, Powell also emphasized the Fed’s continued commitment to sustainably bringing inflation down to 2%, not ruling out the possibility of future rate hikes. After Powell’s speech, the implied probability of no rate hike in November by CME rate futures rose to 99.9%. However, the 10-year U.S. Treasury yield surged again last week, briefly breaking through 5.0%. In the short term, expectations of rate hikes are no longer the main focus for U.S. Treasury yield traders. The rise in rates on the day of the speech could be partly interpreted as a hawkish view of Powell’s cautious remarks, and partly due to concerns about potential expansion in U.S. fiscal policy and increased bond issuance. Overall, it is speculated that the 5% level of the 10-year U.S. Treasury yield is what the Fed sees as the cap, and in the short term, U.S. Treasury yields will continue to operate at high levels. In the long term, based on the dot plot and market forecasts, the Fed is likely to start cutting rates next year. The shift in the main axis of the Fed’s monetary policy in 2024 will change the underlying logic of global major asset allocation. The window for gold and BTC allocation is approaching; it is more a matter of timing.

1、Gold

The real yield of U.S. Treasuries remains the primary driver of gold prices. After the reversal of the cycle next year, the negative correlation between gold prices and the real yield of 10-year U.S. Treasuries is expected to revive, making the latter a major and continuous price driver for gold. Secondly, the trend towards a multipolar international monetary system, the push for “de-globalization,” and the rise of non-U.S. currencies will likely weaken the U.S. dollar’s credit in the long cycle, supporting central banks’ continued gold buying. Therefore, in the long term, gold is expected to enter an upward cycle under the dual influence of cyclical reversal and structural changes, breaking its previous historical high.

In the short term, gold prices will continue to fluctuate, with geopolitics remaining a key factor. The price trend will depend on whether the Israel-Palestine conflict expands to other Middle Eastern regions. The author believes that if the conflict is confined to Israel and Palestine, the upward trend of gold will likely subside, making it difficult to break the psychological barrier of $2000 per ounce. However, if the conflict spreads to surrounding oil-producing countries like Iran and Saudi Arabia, or in extreme cases, leads to an oil embargo or a sharp drop in production, it could significantly impact the oil supply chain, further driving up the prices of oil and gold. The resultant increase in energy prices, cascading to other commodity prices, could lead to a rebound in CPI growth, adding more variables to the macroeconomic environment. Based on the current situation, the former scenario seems more likely.

2、BTC

Similarly, with the Fed starting the next cycle in 2024, overall market liquidity will improve, global investors’ risk appetite will increase, and combined with BTC’s unique market logic, influenced by ETFs and halving events, Bitcoin is likely to enter a bull market again, potentially breaking its previous highs. In the short term, the driving factors remain the SEC’s approval of BTC ETF spot, with BTC prices recently soaring above $34,000. The specific impact of spot ETFs on BTC prices and predictions post-approval will be discussed in depth in future research reports. Stay tuned.

• This article reflects the personal views of the author and should not be construed as investment advice.

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