A Flight To Structural Safety
The Behavior Of Gold & Bitcoin Gets Interesting
In the past, I’ve made light of the notion of bitcoin as a safe haven asset. After all, a traditional safe haven is supposed to help ensure the safety of capital and increase the likelihood that it’ll be there when you need it. If an asset is three times as volatile as the S&P 500, let alone Treasuries, is there really any “safety” there?
But that discussion mostly centers around price volatility and how bitcoin fits into a broader portfolio. What it doesn’t necessarily consider is bitcoin as a hedge against structural volatility. The crypto bulls will argue that one of the biggest advantages of bitcoin and other coins is that they’re decentralized and, therefore, independent of what’s going on in the regulated financial system and the actions of the Federal Reserve.
For the most part, we’ve seen bitcoin act more like a growth stock over the past several years under more normal market conditions. The rally we’ve seen in October, however, looks like something different. There’s a fair amount of noise around the potential approval of a bitcoin ETF by the SEC right now, but when considered in conjunction with other asset classes, I think we’re seeing a structural hedge taking place.
Gold is the one asset along with bitcoin that I think is telling this story. The precious metal is currently having its best run since March (more on that in a moment) right at the same moment that bitcoin is having its best run since the 1st quarter. The fact that both of these rallies are happening at the same moment suggests to me that investors may be flocking to non-financial system assets right now, not necessarily to less volatile assets (although the behavior of defensive equities right now suggests that’s probably happening too).
Let’s start by looking at the historical performance chart of both bitcoin and gold.
As you can see, there are some similarities in the chart pattern during specific periods, but nothing that would indicate a long-term correlated relationship. Gold’s correlation to equities is virtually zero meaning that it’s an asset that pretty much does its own thing. Gold’s correlation to bitcoin swings pretty wildly between positive and negative over time without much respect to the underlying market environment. In other words, bitcoin and gold should have no discernible correlation to each other under normal circumstances. The fact that both are moving sharply higher with essentially the same starting date suggests that something might be off here.
I want to zoom in to the past couple years to show why I think this is particularly concerning.
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.