Bitcoin and Gold – Outlook, Volatility and Safe Haven Diversification

– Recent performance of Bitcoin and Gold

– Price outlook

– Bitcoin, China and capital flight

– Exchanges of value?

– Can bitcoin rival gold as a safe haven?

– ‘Bitcoin vs Gold’ or ‘bitcoin and gold’?

– Importance of diversification

– Conclusion: A monetary and financial revolution?

Recent performance of bitcoin and gold

What does the recent volatility and surging price of bitcoin mean for the future of the crypto-currency and does its recent outperformance mean that it may supplant gold as a safe haven currency? Can bitcoin rival gold as a safe haven? Do bitcoin’s recent price gains herald gains for gold in 2017?

bitcoin

Bitcoin in USD – 1 Month via Coin Desk

2016 was a pivotal year for both the gold price and the price of bitcoin. In dollar terms, both made new gains that have not been since in the last four years. However, the fledgling digital currency greatly outperformed gold.

Gold climbed 8.6 per cent in dollars last year, outperforming both US Treasuries and the US Dollar itself. Despite ending its four year decline and gold being higher in all major currencies, sentiment in the media and among investors remains tepid towards gold as it had a poor second half to the year and failed to end the year above its July high of $1,366.

This despite strong gains in dollar and euro terms and surging over 31% in British pound terms and protecting UK investors and savers from sterling’s devaluation.

In contrast, 2016 saw the bitcoin price climb by more than 100% (see FT chart). With a climb of 126% it greatly outperformed all major fiat currencies in 2016.

In terms of significant developments in the gold market, 2016 was very important for gold. John Hathaway’s recent Tocqueville Gold Strategy Investor Letter pointed to two bullish factors that came to fruition in 2016 and will continue to benefit gold. Namely:

  • First is the new Shariah Gold Standard, launched by AAOIFI and the World Gold Council, and brought to your attention here. This opens up investing in physical gold to approximately 25% of the world’s population – over 100 million investors

  • “Second, is the incorporation of gold as a settlement currency to facilitate trade between oil-producing nations and the world’s largest hydrocarbon importer, China. Russia, Saudi Arabia, and Iran are settling most, if not all, of their energy sales to China in yuan convertible into physical gold via the Shanghai Gold Exchange”

2016 was also a year of significant maturing for bitcoin, this was in part thanks to the developments made in the underlying technology – the blockchain – but also because it had a year of lower volatility. It also began to react to macroeconomic developments, indicating that bitcoin traders and some buyers are now considering its role in the world beyond the cryptocurrency system, and instead as a form of currency hedge.

Last year was the first time in which we really saw the bitcoin price start to react to surprise economic factors, namely the hike in Federal Reserve rates last month. The Washington Post writes:

“When Greece threatened to leave the European Union in 2015, investors surged into the digital currency. The same thing happened when Britain voted to leave the European Union last year, and when Donald Trump defied polls to win the U.S. presidential election. Recent economic surprises in China, India and Venezuela that threatened to destabilize those countries’ paper currencies sparked an interest in the digital alternative as well.” 

Bitcoin began to act more like gold – a  hedge against geo-political, systemic and monetary risks.

Outlook for in 2017

The outlook for both bitcoin and gold looks positive in 2017. There are many positives for both gold and bitcoin as prices and holdings of both assets look set to benefit from speculators and investors’ desires for diversification, alternative currencies and safe havens.

Gold price predictions for 2017 range from $1,100 to $1,600 and beyond. Following a near 9% jump in 2016 a Bloomberg survey of analysts expect, on average, a climb on 13% this year. Goldcore, one of the analysts surveyed by Bloomberg sees gold reaching an annual high of $1,600 per ounce and closing the year over $1,400/oz.