Gold’s recent pullback may pave the way for a potential catch-up trade for Bitcoin, according to market experts. Notably, gold has experienced a significant six-day decline of approximately 10%, a rare occurrence happening only ten times in the last 45 years. Historically, within a two-month period following such drops, gold has typically regained its losses, averaging a rebound of about 8%.
Despite both gold and Bitcoin facing downturns this week, their market narratives appear to diverge significantly. Gold’s decline follows a sharp reversal after a prolonged rally, while Bitcoin has exhibited relative strength, remaining up about 2% for the week, based on CoinGecko data. Tim Sun, a Senior Researcher at HashKey Group, indicated that the recent behavior of gold could be attributed to easing geopolitical tensions, trade frictions, and profit-taking.
This performance divergence has reignited discussions about the lead-lag relationship between these two stores of value. Historically, when gold slows down, Bitcoin tends to rally and vice versa. With gold now down by double digits, some analysts suggest that this may offer Bitcoin an opportunity for upward movement in what they describe as a catch-up trade. Ryan McMillin, Chief Investment Officer at Merkle Tree Capital, noted that while a swift rebound for gold shouldn’t be taken for granted, the current pause in gold momentum could indeed provide Bitcoin the space to advance.
Sun corroborated this outlook, suggesting that the consolidation period for gold following its recent drop could be extended due to strong returns in U.S. equities, bolstered by the ongoing advancements in artificial intelligence. Historical data points to ten occasions where gold dropped by 10% within six days. In all of these instances, it took about two months for gold to recover, yielding a mean return close to 8.39%.
The demand dynamics for gold and Bitcoin also differ significantly. According to Sun, gold is primarily driven by sovereign wealth funds, central banks, and conservative asset managers, while Bitcoin’s flows are largely influenced by exchange-traded funds (ETFs) and investors with a higher risk appetite.
Looking forward, both McMillin and Sun maintained a cautiously optimistic outlook for Bitcoin. McMillin noted that Bitcoin is entering a phase characterized by institutional adoption and enhanced liquidity, which could propel its next upward movement. Meanwhile, Sun anticipates a “choppy, upward-sloping path” for gold, primarily driven by increasing global fiscal deficits and ongoing risk events. For Bitcoin, a similar trajectory is expected, underpinned by a gradual recovery in macro liquidity.
