Concerns surrounding the U.S. government’s fiscal situation, compounded by a partial government shutdown and a declining dollar, have led to unprecedented spikes in the prices of gold and Bitcoin. Recently, the price of gold surpassed $3,900 per ounce, while Bitcoin exceeded $125,000 for the first time in history, reflecting a broader trend among investors shifting away from fiat currencies.
The U.S. Dollar Index, which tracks the dollar’s performance against six major currencies, saw a decline of approximately 10% year-to-date. This drop has led many investors to engage in a ‘depreciation trade’ to hedge against the weakening currency, thereby intensifying interest in alternative assets like gold and Bitcoin. Specifically, gold prices broke through the $3,900 mark with a 0.35% intraday rise, just a week after crossing the $3,800 threshold. Bitcoin also surged to a new record of $125,689, surpassing its previous high of $124,514 set in mid-August.
The recent federal government shutdown, which began last Wednesday, has accelerated this trend as investors seek refuge in decentralized assets in light of political uncertainties. Analysts have noted that despite the varying impacts of past government shutdowns on Bitcoin, the current situation has resulted in a stronger correlation between the cryptocurrency and U.S. government risk. In contrast to its relatively stagnant performance during the previous shutdown in late 2018 and early 2019, Bitcoin’s price movements now reflect the risks tied to U.S. fiscal policy.
Matt Stucky, Chief Equity Portfolio Manager at Northwestern Mutual Wealth Management Co., has highlighted the momentum behind this ‘depreciation trade,’ attributing it to long-term inflationary pressures and uncertainties surrounding fiscal policy. He emphasized that the Federal Reserve’s rate cuts and declining real interest rates contribute to the favorable climate for asset appreciation.
Market sentiment remains optimistic, with analysts projecting further gains for both gold and Bitcoin. Citi analyst Alex Saunders has dubbed Bitcoin “digital gold,” suggesting a strong correlation in their price movements. His 12-month target for Bitcoin is set at $181,000, bolstered by sustained investor demand.
On the other hand, Komal Sri-Kumar, a former Chief Global Strategist at TCW Group, stresses the historical stability of gold compared to the nascent and volatile nature of Bitcoin. He expects that given global tariff policies and the likelihood of economic slowdown, gold could break through $4,000 per ounce by the year’s end.
Concerns over the U.S. dollar’s long-term viability also resonate among fund managers. Jeff Muhlenkamp, a senior portfolio manager at Muhlenkamp & Co., has raised red flags regarding the current deficit levels, which stand at around 6% to 6.5% of GDP. He believes remedial actions to reduce the deficit-to-GDP ratio are unlikely in the near future, leading his firm to bolster its gold holdings significantly over the past years.
As the market continues to respond to these fiscal dynamics, investors are closely watching both alternative assets for signs of continued price appreciation amidst evolving economic conditions.
