As gold tested $2,000 overnight, traders warned that bitcoin could fall to $30,000 within two weeks.
The price of gold has surged more than 9% since the start of the year, with COMEX gold once again breaching the $2,000 mark in U.S. trading on Monday amid geopolitical crises and global stagflation fears, before quickly falling back.
However, the cryptocurrency known as "digital gold" has taken a beating this year, falling about 15% for the year, and again bucking gold on Monday. Bitcoin briefly fell below $40,000, but rose sharply in the early hours of the morning.
This suggests that risk aversion is driving more investors into gold, even as the rise in the dollar and US Treasury yields has been negative for the metal. This is the most significant shift from digital to real gold since the Russia-Ukraine crisis.
The inverse correlation between gold and bitcoin has investors thinking about bitcoin's "inflation hedge" status.
Jeffrey Halley, senior market analyst at Oanda Asia-Pacific Pte, said: "It is likely that as bitcoin is tested for the first time in an environment of high inflation and rising interest rates, investors are returning to traditional safe-haven assets rather than choosing new ones. Gold has been a hedge against inflation for thousands of years."
In fact, the 50-day correlation between "new" and "old" gold is now around minus 0.4, its lowest since 2018, while the correlation between Bitcoin and NASDAQ stocks has soared as risk assets in general suffer amid rising interest rates and increasingly hawkish central banks.
"Right now, bitcoin is still closely correlated with the NASDAQ 100," Cointelegraph reporter Colin Wu said. The Nasdaq 100 is down about 15% this year, while Bitcoin is down about 16%."
Gold has benefited from risk aversion
The main driver of gold's strength has been risk aversion sparked by the Crisis in Russia and Ukraine. Ukrainian officials say Russia has launched a new offensive in eastern Ukraine.
Moreover, calls for recession are growing louder. The World Bank has cut its global growth forecast for 2022 to 3.2% from 4.1% because of the Crisis in Ukraine. The International Monetary Fund has also warned that the conflict could threaten the world economic recovery. "In short, we are facing a crisis on top of a crisis," Imf managing Director Kristina Georgieva said on Thursday. "The conflict between Russia and Ukraine is not only devastating Ukraine's economy, it is sending shockwaves around the world."
Commerzbank analyst Daniel Piesemann said Russia appears to be gearing up for a major offensive, which has created a lot of demand for gold as a safe haven. One factor driving gold higher in recent days has been strong buying interest from ETF investors.
Bitcoin heading for $30,000?
Cryptocurrencies, on the other hand, fell along with U.S. stocks. Bitcoin and Ethereum have fallen more than 5% and 8% respectively in the past seven days. Overall, the cryptocurrency recovery stalled at the end of March after rising to its highest point since January.
BitMEX co-founder Arthur Hayes said bitcoin could fall to $30,000 by June. "Many crypto market experts believe the worst is over," Hayes said in a blog post. I think they're ignoring an inconvenient truth."
Hayes believes bitcoin and Ethereum will continue to be positively correlated with tech stocks as investors should keep a close eye on market risk sentiment due to the upcoming aggressive tightening cycle.
John Roque, head of technology strategy at 22V Research, has a similar view, saying that technical analysis suggests bitcoin will fall to $35,000, but there is little support there, and then there is a high probability it will fall to $30,000.
Trader Crypto Ed is even more pessimistic, using Elliott Band theory, he thinks bitcoin will repeat its recent downtrend, with a price target of $30,000, reaching that level as soon as two weeks.
Still, the massive global liquidity of the past few years has allowed cryptocurrencies to outperform all other assets by a wide margin.
In a recent interview, MicroStrategy founder Michael Saylor said he felt that converting his company's assets into bitcoin was the best hedge against inflation.
While the short-term correlation between gold and cryptocurrencies is significantly negative, in the medium term they both send the same message of dollarization and loss of confidence in the supremacy of the US dollar.