Bitcoin ETFs are not competing with gold as the precious metal holds above $2,000

(Kitco News) – Reminiscent of 2019, the debate between gold and Bitcoin rages anew as the two assets see a stark contrast in investment demand.

In January, the Securities and Exchange Commission, in a long-awaited move, approved the launch of 11 spot Bitcoin-backed exchange-traded products. Since then, the crypto-backed ETFs have seen inflows of more than $4 million.

At the same time, global gold-backed ETFs have seen investment outflows of more than $3 billion since the start of the year. Specifically, SPRD Gold Shares (NYSE: GLD), the world’s largest gold-backed ETFs has led the exodus in the precious metals market.

However, some commodity analysts warn investors not to read too much into this trend as the negative correlation is not causation. Some analysts point out that gold’s selloff started long before the approval of the Bitcoin ETFs. As February quickly comes to a close, gold ETFs are expected to see nine months of consecutive outflows.

Data compiled from the World Gold Council shows how gold has struggled through the past year.

Some analysts have noted that the 2019 Bitcoin Rally, which culminated in all-time highs above $60,000 per token, did have a major impact on gold demand, impacting prices by 3% to 5%; however, a new interest in Bitcoin as prices trade at a two-year high above $50,000 an ounce is having less impact on gold.

“While the data remains extremely limited, our analysis reveals a near-zero correlation between fund flows into gold and bitcoin ETFs, suggesting its rising availability has grown the pool of capital available to all alternatives, as opposed to splitting the pie between alternative assets,” said commodity analysts at TD Securities in a note Friday. “In fact, a preliminary analysis instead ties flows into bitcoin-related ETFs more closely to speculative tech than to gold. The relentless outflows in gold ETFs are likely related to macroeconomic incentives, which ties into our view that macro traders are historically under-positioned ahead of a Fed cutting cycle.”

In a recent interview with Kitco News, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said he doesn’t see much correlation between Bitcoin and gold.

“All of the demand for the Bitcoin ETFs seems to me to be people selling other Bitcoin products and buying the 11 ETFs rather than new investors coming into the market,” he said.

At the same time, despite lackluster investment demand, gold has managed to hold solid gains above $2,000 an ounce and many analysts expect the market to hit record highs this year.

Milling-Stanley said that if Bitcoin were a real threat to gold, the precious metal would see its price well below $2,000 an ounce by now.

Milling-Stanley explained that one reason why gold and Bitcoin aren’t competing with each other anymore is because of important shifts in the marketplace and in investment demand. He explained that investors are more likely to hold a hard asset due to rising geopolitical uncertainty. He also pointed out that despite its recent rally, Bitcoin remains an extremely volatile asset.

“I certainly don’t trust the safe-haven aspect of Bitcoin. All I see is a volatile asset and I have enough volatility with the Magnificent 7 and other tech stocks,” he said. “Gold will remain an important asset as it provides a portfolio with the dual promise of protection and performance.”

Michele Schneider, director of trading education and research at MarketGauge, said the one factor Bitcoin and gold have in common is they are both a hedge against fiat currency debasement. She added that in the current environment, cryptocurrencies might have a better advantage.

“Gold is old and established and the fact that prices are holding above $2,000 tells us that sentiment in the economy is not as great as everyone would have you believe it is. This uncertainty will continue to support prices,” she said. “But Bitcoin has a completely different function. From a technological standpoint, it’s the new currency hedge. It’s the way new investors are expressing their lack of faith in the powers that be and in fiat currencies.”

Schneider added that Bitcoin’s and the crypto market’s growing functions in the global economy will continue to make it an attractive asset among investors.

“Cryptocurrencies are the future,” she said.

While Schneider is bullish on cryptocurrencies, she said that gold has not become irrelevant just yet.

“Grandpa gold might not be doing much, just waiting around, but he certainly has more life left,” she said. “If geopolitical tensions rise again, gold prices can quickly move past $2,100 an ounce.”

While gold and bitcoin remain two distinctive assets, some analysts note that the precious metal still has one major advantage: central banks remain active buyers.

Many analysts have noted that insatiable central bank demand has weakened the impact Western investors have on gold prices.

In 2023, for the second year in a row, central banks bought more than 1,000 tonnes of gold. Meanwhile, over-the-counter gold purchases helped push global gold demand to record highs last year.

Some analysts have noted that Asia, specifically robust consumer demand in China, continues to dominate the market and is a critical factor in why prices have managed to hold critical support above $2,000 an ounce.
 

West can’t seem to understand the gold mkt. no longer revolves around the U.S. (&UK). Central banks & investors around the world are heavily buying gold & all the West’s multi-hundred ton dumping from gold ETFs & taking their gold futures positions to multi-yr lows won’t stop it.

— fred hickey (@htsfhickey) February 19, 2024