Weaker crypto could hold the key to stronger gold. Recent price action would seemingly suggest that investors are in the market for alternative asset classes that may provide a hedge against rising inflation and a weaker dollar. Investors may have more choices today, however, on where to put that cash to work.
The rapid and sharp rise seen in Bitcoin in recent months could be indicative of what investors are thinking. The digital currency saw a rapid run higher, marching from under $20,000 per coin to over $60,000 per coin in a matter of months. Although the rally may be largely dismissed, there are those that feel the buying in Bitcoin and cryptos represents a changing of the guard when it comes to alternative asset classes.
As the price of Bitcoin climbed steadily, the value of gold languished sideways. Obviously, there could be multiple reasons for this. It does seem odd, however, that as capital flowed into crypto it did not show a significant flow into gold. After hitting a peak recently of over $60,000, the Bitcoin market has reversed course and has dropped some 40% from the high. During this decline, the price of gold has garnered strength and the yellow metal could be on its way to previous all-time highs or beyond. To the layperson, it may seem as if capital is now flowing into gold as it flows out of crypto.
If selling pressure in cryptos remains in place, buying pressure in gold could mount. Investors are hungry for an asset that can protect them from rising inflation and dollar weakness, and the gold market has a very long history of being a reliable store of value and protector of wealth. That trend appears set to continue as inflationary pressures steam up and as the Fed keeps rates low and policy loose. Investors may, at times, seek out Bitcoin or other cryptos. These asset classes do not have gold’s history, however, and cannot be held in the hand like gold bullion. They may, therefore, lose ground to gold in the race for capital and the yellow metal may rise while cryptos move sideways or decline.
Slow and steady often wins the race. That anecdote may prove to be the case when it comes to gold and cryptos. The long-term investor is likely more concerned with the asset’s long-term capabilities and rapid price ascents are not overly impressive. Smart investors also understand that markets do not typically go straight up or straight down. The more rapid and aggressive the move higher in Bitcoin or cryptos is, the more likely the market may come back down at some point to back and fill. This tendency can lead to many buyers getting caught buying at or near the highs, right before the market corrects. As these buyers look to exit the market, the sell-off may intensify driving prices even lower.
The relationship between gold and cryptos is a new one and may be worth watching in the future. Until proven otherwise, it would appear that gold is the superior asset class for wealth protection and long-term investors may find it far more suitable compared to cryptocurrencies.