This is because Bitcoin is considered a high-risk, high-reward asset and is usually sold off first when the risk-off sentiment hits the markets. Investors then shift their funds into more reliable and less volatile assets. In fact, August has vividly demonstrated this relationship, as gold increased by 2.2% during the month, while Bitcoin price dropped by 8.5%. However, Bitcoin has outperformed gold year-to-date (y-t-d), gaining 44% (see the chart).
Over time, this situation may change as Bitcoin gains credibility among institutional investors. Several Bitcoin ETFs were launched earlier this year, which have begun to reshape the cryptocurrency market. Specifically, ETFs reduce Bitcoin's volatility as demand becomes more stable. Moreover, Bitcoin ETFs compete with Gold ETFs for investors' funds.
According to The Block, a crypto research portal, in August 2024, inflows into BTC ETFs exceeded $200 million, bringing the total since their launch close to $60 billion. For comparison, the total assets under management (AUM) in gold ETFs amount to approximately $90 billion. 'If this trend continues, Bitcoin ETFs could surpass gold ETFs by the end of the year. In the long term, competition with Bitcoin is likely to exert bearish pressure on gold prices,' said Kar Yong Ang.
Fundamentally, the outlook for gold looks bright. We have singled out three important bullish factors that will continue to play out in September 2024.
Gold is priced in U.S. dollars and is therefore highly sensitive to changes in U.S. interest rates, inflation, and the greenback's value. As already mentioned, the market is positioned for a dovish Fed. In fact, the latest interest rates swap market data implies roughly 220 bps worth of rate cuts by the Fed by the end of December 2025. This means the market expects the U.S. central bank to cut the borrowing costs in half over the next five quarters. It is widely expected that other central banks will not fall far behind.
Investors expect the European Central Bank (ECB) to deliver three quarter-point rate cuts by the end of January 2025, while the Bank of England (BoE) is anticipated to announce at least two rate cuts of 25 bps each before the end of February 2025. Fundamentally, a less tight (or loose) monetary policy worldwide is a major bullish factor for gold. Because gold has no passive income and does not pay any interest, the opportunity cost of holding it becomes lower when central banks reduce their policy rates. The main risk is, of course, inflation. Should it remain above central banks' targets or, even worse, start to increase, the Fed and its counterparts will be forced to hold the rates higher for longer.
The conflicts in the Middle East and Eastern Europe, such as the Israel-Hamas hostilities, the Red Sea crisis, and the ongoing tensions between Russia and Ukraine, have destabilised world politics and raised many fears ranging from oil and food supply disruptions to the prospect of a worldwide conflict. Gold, considered a 'safe-haven' asset, typically sees increased demand during political uncertainty and instability. While it is extremely difficult to project the resolution of geopolitical conflicts, let alone to forecast the emergence of new ones, peace negotiations in the hottest regions are yet to commence. 'Until there is a clear path to stability, investors would prefer to err on the side of caution and will simply buy gold 'just in case'. Nobody wants to be caught shorting the bullion when the news of another military incident here or there hits the newswires', says Kar Yong Ang, global broker Octa analyst.
The upcoming U.S. elections further complicate the global political landscape, adding another reason for gold prices to keep rising. Due to its safe-haven status, gold typically experiences increased buying interest during electoral volatility. Historical data indicates that on a micro level, gold prices tend to rise in the months leading up to an election and may continue to do so if the election results are contested or lead to significant policy shifts.
Physical demand for gold may continue to increase thanks to China and India, two major gold consumers. Specifically, China has seen its national currency, renminbi (RMB), appreciate more than 2% over the past month. This is not a welcoming development for a country whose economy heavily depends on exports. Thus, Chinese authorities may relax gold import quotas to stop the yuan from appreciating too much. As a result, the physical and investment demand for gold in China may rise in the months ahead.
Retail demand in India will probably remain robust following the government's decision to cut import duties on gold and silver from 15% to just 6%. This decision comes ahead of the Indian festive season (October - March) and may boost jewellery consumption in the country.
From a technical perspective, during a 4-hour timeframe, we observe the first signs of weakness. RSI signals bearish divergence, and the growth rate has slowed down. Despite the bullish trend in gold in general, the price may decline towards the 2,475.00 support level. At this level, the ascending trend line and a 200-day moving average will act as support. Since the trend is generally bullish, the price may renew the maximums after a mild correction. If the price fails to hold the 2,475 level, it may drop towards 2,360-2,400 (dashed arrow on the chart).