The Astonishing Rallies of Gold and Bitcoin: A Symphony of Geopolitics, Policy Expectations, and Market Sentiment

The Astonishing Rallies of Gold and Bitcoin: A Symphony of Geopolitics, Policy Expectations, and Market SentimentRecent movements in gold and bitcoin, often dubbed "digital gold," have captivated global financial markets. These assets have staged a dramatic price performance, a complex interplay of geopolitical events, policy expectations, and market sentiment

The Astonishing Rallies of Gold and Bitcoin: A Symphony of Geopolitics, Policy Expectations, and Market Sentiment

Recent movements in gold and bitcoin, often dubbed "digital gold," have captivated global financial markets. These assets have staged a dramatic price performance, a complex interplay of geopolitical events, policy expectations, and market sentiment. After a brief pullback following Trump's election, gold prices have rebounded strongly, while bitcoin has repeatedly hit new highs, sparking considerable market discussion. This article delves into the driving forces behind the recent price movements of both gold and bitcoin, as well as the potential risks and opportunities for the future.

Gold: Struggling and Rebounding Amidst a Strong Dollar and Geopolitical Risks

After a significant approximately 10% correction following Trump's election, gold prices staged a five-day consecutive rally for the first time since March, successfully breaking above the 50-day moving average ($2664). This rebound is closely linked to an unexpected escalation of geopolitical conflict. While the market generally anticipated that a strong dollar, high inflation, and a relatively moderate foreign policy under the Trump administration might curb gold's rise, major Wall Street investment banks have been bullish on gold, recommending "buying the dip." Goldman Sachs even maintained its optimistic forecast for gold prices, projecting a price of $3000 by December 2025, citing sustained central bank gold purchases and potential interest rate cuts as supportive factors.

However, gold's price journey has not been smooth. In the first week of November, gold initially hit a record high before a swift downturn, with spot prices falling from near the all-time high of $2800 to the $2500 range, representing a short-term drop of nearly 10% one of the largest in recent years. The World Gold Council attributed the price decline to several factors: a strengthening dollar, lagged momentum factors, outflows from gold ETFs, and the unwinding of pre-election hedging positions leading to a decline in net long positions held by managed money at the COMEX. In the first week of November, global gold ETF outflows were estimated at approximately $809 million (12 tonnes), with the largest outflows from North America, although strong inflows from Asia partially offset this, reflecting concerns about a resurgence of US-China trade friction. Furthermore, net COMEX holdings decreased by 8% (74 tonnes) compared to the previous week.

The World Gold Council noted that the US election results objectively curbed gold's year-to-date surge. Persistent strength in bond yields and the dollar, increased risk appetite in the stock market, the flourishing cryptocurrency market, and an easing of geopolitical tensions all could have paused, or even caused a healthy short-term correction in, the gold rally. However, numerous overseas investment banks and asset managers still favored buying the dip, generally considering $2400 to $2500 as the bottom of the correction. The unexpected escalation of the Russia-Ukraine conflict accelerated gold's rebound, with a general consensus that geopolitical risks will remain in the future.

Goldman Sachs believes that the role of commodities in investment portfolios is increasingly diversified, with long positions in gold and oil being particularly important as key inflation and geopolitical hedges against tariff escalations (gold), geopolitical disruptions to oil supply (oil and potentially gold), and debt concerns (gold). UBS, in its new year outlook, also mentioned that gold, while slowing, remained a winner, with robust gold demand from central banks and the retail market as they sought portfolio diversification. Even with a slowdown, it would still be a commodity winner, while investor enthusiasm for copper would be hampered by sluggish economic growth.

Although the US Dollar Index recently approached the 108 mark, the World Gold Council believes that gold's price is becoming less influenced by US Treasury yields and the dollar's movements. During October and much of 2024, the majority of gold's returns were generated during Asian trading hours. Some buying may be related to "sanctions" measures, but central bank gold purchases slowed in Q3, suggesting investor-led demand. Trump's tariff policies may put more pressure on Asian stock markets, a significant factor in the continued strong demand for gold investment in China this year. Furthermore, Republican fiscal policies could potentially trigger inflation: tariffs, immigration responses, tax cuts, and lower borrowing costs could all impact inflation data. Simultaneously, excessive fiscal deficits will continue to put pressure on US Treasury creditworthiness, and concerns about fiat currencies are favorable for gold.

Bitcoin: A Meteoric Rise and Cautious Observation Under the Halving Effect and Policy Expectations

Bitcoin's rally has been far more robust than gold's, but its extreme volatility has led speculators and traders to take profits. In early November, Bitcoin, priced in the $70,000 range, quickly surged towards the $100,000 mark. A veteran miner noted that Bitcoin halving (occurring roughly every four years, reducing the reward miners receive for verifying transactions by 50%) reduces the supply of newly minted bitcoins, increasing scarcity and typically driving up prices. This year, Bitcoin benefited from both the halving and Trump's ascent to power; Trump's relatively lenient attitude towards cryptocurrencies has been positive for the market.

The miner also mentioned that Bitcoin bear market declines are gradually shrinking, indicating market maturation. For example, the 2011 bear market saw a -93% drop, 2015 -85%, 2018 -86%, and 2022 -76%. Furthermore, the rebound magnitude after halving is also narrowing, with the current rebound at 42%, lower than the 53.3% and 122.5% seen after previous halvings. Reduced volatility reflects a maturing market with a growing proportion of long-term investors.

Despite this, the cryptocurrency market remains susceptible to extreme speculation, with policy expectations being a dominant driving force behind this rally. The market anticipates that the Trump administration may adopt more crypto-friendly policies, such as establishing digital asset policy positions and developing a regulatory framework for cryptocurrencies. The miner cautioned that while the current price is approximately $99,000, a potential drop of up to $30,000 within a month is possible, urging investors to carefully assess risks.

Forex.com's Global Head of Research, Fawad Razaqzada, also pointed out that the Crypto Fear & Greed Index reached 94, indicating "extreme greed," essentially the highest ever recorded. Inflows into exchange-based crypto asset investment vehicles remained near record highs last week. As of last Friday, Bitcoin ETFs saw massive inflows of nearly $3 billion in just the past four days. In the long term, the inflow of funds from "traditional finance" investors provides incremental demand for Bitcoin, helping to support the price.

Bitcoin's test of the $100,000 level is this a profit-taking zone, or a stepping stone to $120,000+? Currently, more are choosing to take profits and wait. Razaqzada noted that after consolidating around $90,000 for a week, Bitcoin experienced a sharp breakout mid-week, rising to above $99,000. Momentum and sentiment are very bullish, but whether the upcoming resistance levels of $100,000 (psychologically significant) or $102,000 (161.8% Fibonacci extension of the 2021-2022 correction) will trigger a round of profit-taking, especially with the RSI showing potential bearish divergence, still requires price reversal to confirm the signal.

In summary, although Bitcoin faces positive factors such as halving and policy tailwinds, the market's up and down cycles have narrowed compared to the past, implying that both gains and losses could be faster and deeper. Moreover, significant breakouts from prolonged consolidation periods often exceed expectations, so traders may need to be cautious about any contrarian trades.

Conclusion: A Market of Risks and Opportunities

The recent performance of gold and Bitcoin reflects the intertwined influence of complex geopolitical situations, policy expectations, and market sentiment. Gold's performance amidst a strong dollar and geopolitical risks highlights its role as a safe-haven asset. Bitcoin, driven by the halving effect and policy expectations, has demonstrated a strong upward trend, but its high volatility reminds investors to exercise caution. In the future, investors need to closely monitor geopolitical risks, monetary policy changes, and market sentiment to better seize market opportunities and mitigate potential risks.