The S&P 500 slid 0.9% Tuesday, while Bitcoin slid 5% over the past 24 hours. In comparison, continuous-contract gold futures were up 1.8% on Tuesday, trading at record highs close to $3,000 per troy ounce. Gold has jumped 10% over the last month alone, an eye-popping gain for a usually stodgy commodity.
Understanding why gold has gained while
spirals lower alongside the
index says a lot about the market we’re currently in—and that investors might be taking the outcome of the Federal Reserve’s inflation battle for granted.
For starters, even though crypto bulls have long called Bitcoin “digital gold” and a store of value to rival the legacy haven asset, that thesis hasn’t really been borne out. Bitcoin has instead shown itself to be more correlated with risk-sensitive assets like stocks, and any link the token has had with gold is fading. Over the past six months, the correlation between Bitcoin and gold is very low at 7.2%—a 100% link would denote the two assets trade in sync.
Over the past month, this correlation has faded over the past month to just 3.5%. Once we view Bitcoin as a risk asset, Tuesday’s price action and the crypto’s divergence with gold make more sense.
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What is particularly interesting is gold continues to rise while Treasuries are also selling off. Government bonds and gold typically compete for investor attention as assets that tend to be viewed as safe and steady bets.
The main reason the precious metal is diverging from both risk assets and Treasuries is inflation—along with some unique factors that are also buoying gold.
Recent economic indicators—including manufacturing data out Monday—are eroding investor expectations that inflation is falling enough to allow the Fed to cut interest rates from their generational peak soon.
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Traders are pushing back rate-cut bets on worries that persistent inflation will force the Fed to keep rates higher for longer than previously thought. This explains the sag in stocks: Equity valuations come under pressure when rates are higher. In the case of Treasuries, traders price in the prospect that bond yields—which move inversely to bond prices—will stay higher alongside rates.
Gold, however, actually stands to benefit as well if the Fed cuts rates. When Treasury yields are higher gold looks less attractive, as the precious metal has no yield. But there are bigger things going on for bullion. Crucially, gold has long been viewed as an inflation hedge—a rare commodity with an inherently limited supply. If investors are fretting about inflation, they could buy gold as everything else sells off.
That gold is rising amid inflation worries could be a sign that some market participants have underestimated the risk that inflation poses to stocks and Bitcoin. Have investors been taking for granted the comfortable narrative that inflation is falling and the Fed, surely, will cut rates?
More broadly, other factors also continue to benefit gold, including demand from China and India—as well as a trend of gold-buying among central banks. With gold on such a roll, too, the momentum could be luring in more traders to exchange-traded funds like the
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The conditions in markets generally could also be a tailwind for gold, according to Mike McGlone, an analyst at Bloomberg Intelligence. McGlone highlights subdued volatility in equity markets. The Cboe Volatility Index or VIX, Wall Street’s so-called fear gauge, remains near decade-plus lows even after a spike on Tuesday, while Treasury yields have surged.
“Depressed stock-market volatility and high interest rates are typically headwinds for gold, until they aren’t,” McGlone wrote in a Tuesday note. “The combination of a buried gold-to-S&P 500 ratio and lowest VIX vs. highest one-year U.S. Treasury-bill rate since 2007 may be solidifying support for the metal.”
Write to Jack Denton at jack.denton@barrons.com