Bitcoin’s role as the new gold – a safe haven for investors – continues to hold merit.
A correlation emerged between gold and cryptocurrency prices late last year as investors began trading gold for bitcoin. Analysts expect the trend to continue, despite the recent decline in bitcoin’s price.
Precious Metal Capital Diverts To Bitcoin
Thomson Reuters analysts, in their 2017 Gold Survey released in January, noted the rising cryptocurrency prices in December diverted significant amounts of capital from precious metals. The report said retail investors have a shorter investment horizon nowadays, and many were unable to resist the temptation to get on board with cryptocurrency.
Christopher Louney, RBC Capital Markets strategist, said the development – a potential correlation between gold’s value and cryptocurrency prices – is fairly recent, reports Fortune. He said he has noticed a potential correlation between gold’s value and cryptocurrency prices.
While there was no relationship previously, Louney said the trend emerged late in 2017 and continued into early 2018—indicating that as bitcoin’s price soared in quadruple digits, investors could have been offloading gold to buy cryptocurrencies.
Louney stressed the correlation is minor—not enough to move gold prices, and not enough to say that investors are presently considering bitcoin as gold’s replacement. The macroeconomic factors that have traditionally impacted gold prices continue to dominate the playing field, such as stock market performance.
Louney said he expects gold prices to end the year lower than they started, around $1,303 on average for the year, mainly due to rising equity returns.
A Long Road Ahead
Bitcoin, besides being volatile, is still a relatively unknown asset compared to other investment assets. Gold, by comparison, is well established with institutional investors and has plenty of liquidity.
While bitcoin trading volumes totaled to just over $3 billion in daily trading recently, gold trading volumes hit $250 billion a day, according to the World Gold Council.
The bitcoin-gold correlation could increase over time, said Looney. The evolving relationship also means the converse could occur, whereby bitcoin investors cash in their cryptocurrency in hard times for gold as a less volatile asset.
In a report sent to the bank’s clients in January, Goldman Sachs analyst Zach Pandl wrote that the rapid increase in demand for bitcoin has been triggered by the growing dissatisfaction with regulated monetary systems and the current banking infrastructures.
In the long-term, as cryptocurrencies mature and evolve into a major asset class, Pandl said digital currencies like bitcoin will pose lower returns but demonstrate a high level of stability, like gold and other safe-haven assets.