Opposites Attract – Gold Can No Longer Ignore Bitcoin
Atlas Pulse Gold Report Issue 99;
The US Government holds 261.5 million ounces of gold worth $680 billion and 203,222 Bitcoin worth $18.9 billion. Is that enough to start a strategic reserve? President-Elect Trump thinks it is. The confiscated Bitcoin will no longer be held at the crime bureaus but by the US Treasury, presumably in Fort Knox. Bitcoin and Gold will sit side by side.
Opposites Attract
Since the end of October, the gold price has fallen by 7% in dollars and 4% in euros as the dollar has surged. While gold is giving back some of this year’s spectacular gains, Bitcoin has taken over. As I have long said, these assets take it in turns, and the baton has been handed back to Bitcoin. The inverse moves between Bitcoin and Gold in November have been remarkable.
Bitcoin and Gold do not have a perfect negative correlation but a persistent low correlation. That is sometimes positive when the dollar had decisive moves in years such as 2018, 2020, and 2022. The correlation has occasionally been negative, as it is now, but less frequently. The ten-year average correlation was 9%, which is minimal. This is why Bitcoin and gold are such a natural pairing, as holding uncorrelated assets side by side provides natural diversification.
The Trump administration is pro-business and pro-fintech, which is why the payments companies have rallied. Alternative money, stablecoins, and cross-border transactions will be made easier under Trump, and capital markets will benefit from less regulation. This means Bitcoin and crypto now have a country they can call home, and it’s no longer El Salvador but the USA.
This is important for the gold market and should not be deemed as a threat. The growth in global equity issuance never killed the bond market; indeed, it thrived. My point here is that in alternative assets, gold is the bond, and Bitcoin is the equity. They sit well together, and as investors realise this, both markets will benefit. The $128 trillion wealth management industry is underweight gold, as I have covered in recent issues. Their exposure to Bitcoin is approximately zero. The Bitcoin and gold partnership has a long way to go.
Technicals – Past Gold Peaks and Corrections
A 7% correction rarely makes the headlines, but this one is event-driven, with much of it coming after the US election was declared. I will dig into why later. In the meantime, gold was up 40% over the past year, but now 29%. The 200-day moving average (200 MA) remains in a strong uptrend, but the short-term trend has broken. Gold was 18% ahead of the 200 MA at the end of the October peak, with just 11% volatility (30-day), which is low. The chart starts at $100, making it easier to gauge the price changes.
The high was 40% over a year, which is a good run for the Gold price. I compare that to previous peaks (if, indeed, this is one).
In 2011, the run-up had been 55% before an 18-month consolidation, followed by a fall in 2013 when real interest rates rose. Gold traded 29% above its 200 MA at the peak and had a volatility of 29%, which is high for Gold.
Back in 1980, the age of the cassette tape, Gold had risen 260% in the preceding year and was trading 141% above the 200 MA, with volatility of 115%. This is what a gold mania looks like.
If the high of $2,790 in October 2024 turns out to be a major top, it will be the calmest on record and the one without a frenzy. Gold never has tops like that, which leads me to believe this is a correction within a bull market and not a lasting peak. That said, the coming consolidation could last for some time.
Macro - Rising Real Rates, Strong Dollar
The US election result shocked the markets. We know that because prices have been rejigged in recent days; some higher, some lower. Interest rate swaps in the US and Europe have diverged sharply. Europe will continue to see interest rates fall, while in the US, they will hold firm. The expectation is for a strong economy, which has caused the dollar to surge.
That strong dollar move has been accompanied by a rise in real interest rates since early October, from 1.6% to 2.1%. That alone would justify the correction in the gold price we have recently seen. Bond yields are rising on higher growth expectations, while inflation expectations are rising at a slower pace. This has seen a 0.5% rise in 10-year real rates, which has weighed on gold.
When people say that real rates no longer matter because gold shrugged off the 2022 surge in real rates from -1% to 2.2%, they are mistaken. Gold has been structurally revalued as the world has changed, but gold and real rates have always been uncorrelated and remain so to this day.
That’s important because the gold bear case would require real rates to keep on rising. How far can they go? In late 1999, they touched 4%, and the stockmarket crashed. In 2008, 3% wasn’t much fun either. The last Trump administration, from 2016 to 2020, saw them fall sharply in the second half of his term.
Should real rates start to fall, which they can only do from a high level, then the gold bull market will be back on track.
One important point to consider is this crypto-friendly administration will see Elon Musk become the head of the Department of Government Efficiency (DOGE). This is a government that will be led by the Tech Bros. These are the right-leaning technology companies and their backers who will step up to transform the USA. Musk has pledged to save $2 trillion of annual government spending. Should we believe him? He launched a rocket into space on a shoestring budget and fired 80% of the staff when he took over Twitter. Maybe it’s best not to bet against Musk’s skills in budget restraint.
This is a bold attempt to reduce the escalating cost of government using technology, and we should all hope they succeed because if they do, the rest of the world will have a model to follow. And it surely needs one, especially over here in Europe. Trump might balance the budget, which, for a property guy, would be truly remarkable.
That would mean the US government would reduce the deficit and give hope to the bond market that fiscal prudence is back. Add that to Trump’s geopolitical deal-making, with tariffs replacing missiles, and there could be an outbreak of peace. Wishful thinking, perhaps, but the gold bull narrative has been a hedge against debt and deficits. A strong dollar, higher real rates, a balanced federal budget and an outbreak of peace would not make for a strong gold bull case over the medium term.
While I believe Musk will apply an axe to the state, and a ceasefire in Ukraine seems likely, as indicated by the rally in Ukrainian bonds, you can be sure that a Trump administration would boost the money supply. Trump loves money, and with him around, there will be plenty of it. Remember that Trump’s last term saw the gold price rise by 67%.
The US money supply has already turned up and has a long way to go. Calibrating gold with US M2 since 1973 puts gold at fair value. Where there’s money, there’s gold. It’s best to remain a long-term bull.
Flows- Why are the Germans Selling Gold?
It reminds us that investors still haven’t committed to this gold bull market, and a top seems unlikely when the trade is not crowded. When looking at the gold ETF sellers, blame the Germans. I have no idea why, but they have sold a million ounces this year. Please write in if you know why.