Gold and Bitcoin: A Duet Under the Trump Effect

Gold and Bitcoin: A Duet Under the Trump EffectRecently, the movements of gold and its digital counterpart, Bitcoin, have captivated global investors. After a significant 10% correction following Trump's election, gold prices have rebounded for five consecutive days for the first time since March, reclaiming their position above the 50-day moving average ($2664)

Gold and Bitcoin: A Duet Under the Trump Effect

Recently, the movements of gold and its digital counterpart, Bitcoin, have captivated global investors. After a significant 10% correction following Trump's election, gold prices have rebounded for five consecutive days for the first time since March, reclaiming their position above the 50-day moving average ($2664). The unexpected escalation of geopolitical conflicts further accelerated this gold price recovery. Despite widespread market expectations that a strong dollar, high inflation, and a relatively moderate foreign policy under Trump's administration might suppress gold's rise, major Wall Street investment banks have been calling for "buying the dip." Goldman Sachs even maintains its prediction of a $3000 gold price by December 2025, believing that central bank gold purchases and potential interest rate cuts will continue to support gold prices.

Bitcoin has mirrored gold's bullish momentum. Following Trump's election, Bitcoin's price surged to around $98,000, just shy of breaking the $100,000 mark, representing a year-to-date gain of nearly 130%. Trump, at the Bitcoin2024 conference, publicly pledged to fire SEC Chairman Gary Gensler on his first day in office if re-elected. He criticized Gensler's strict regulation of the crypto industry, arguing it stifled American innovation in crypto technology, harming US global competitiveness. However, in recent months, numerous traders who had poured into Bitcoin ETFs and BITX (a 2x long Bitcoin ETF) have begun taking profits. A veteran miner told reporters: "Miners are reluctant to sell their machines this year. Bitcoin halving, which occurs roughly every four years, reduces the supply of newly mined Bitcoin. While everyone expects the $100,000 mark is just a matter of time, after such a sharp rally, people tend to take profits first and wait to see what happens after Trump takes office in January."

Institutional Investors Increase Gold Holdings Amidst a Dip

In the first week of November, gold prices initially hit a historical high at the beginning of the month before declining. Spot gold prices fell from near their all-time high of $2800 to the $2500 range, a short-term drop of almost 10%, one of the largest in recent years. The World Gold Council explained their Gold Price Return Attribution Model (GRAM) analysis to reporters, citing the main reasons for the price drop as: a strengthening US dollar; gold lagging behind other market momentum factors; gold ETF outflows; and a decrease in net long positions held by managed money on the COMEX due to pre-election hedging positions being unwound. In the first week of November, global gold ETFs saw an estimated outflow of approximately $809 million (12 tonnes), with the largest outflows from North America, though strong inflows in Asia partially offset these losses. This might suggest renewed concerns regarding a resurgence of US-China trade friction. Furthermore, COMEX net holdings decreased by 8% (74 tonnes) compared to the previous week.

The World Gold Council stated: "The US election outcome objectively dampened gold's year-to-date surge. Contributing factors may include: sustained strength in bond yields and the US dollar, elevated equity market risk appetite, the flourishing of cryptocurrencies, and an easing of geopolitical tensions. These factors may have pressed the pause button on the eagerly anticipated gold rally, even prompting a healthy short-term correction." However, numerous overseas investment banks and asset management professionals interviewed by reporters still favored buying the dip, generally believing that $2400 and $2500 might represent the bottom of the correction. The recent unexpected escalation, rather than de-escalation, of the Russia-Ukraine conflict also spurred a rapid gold price rebound. Its widely believed that various future risks are unlikely to decline significantly. Goldman Sachs suggests that commodities are playing an increasingly diversified role in portfolios, particularly long positions in gold and oil, acting as crucial hedges against inflation and geopolitical risks in extreme scenarios, such as tariff escalations (gold), geopolitical disruptions to oil supply (oil and potentially gold), and debt concerns (gold). UBS also mentioned in its New Year outlook that golds momentum is slowing, but it's still a winner. Strong demand for gold remains from central banks and retail markets as they look to diversify portfolios. Even with slowing momentum, it will remain a top performer among commodities, while investor interest in copper will be dampened by weakening economic growth.

Despite the recent approach of the US dollar index to the 108 level, the World Gold Council believes that gold's price has become less sensitive to US Treasury yields and the dollar recently. During October and most of 2024, a significant portion of gold's returns came from Asian trading hours. Some buying may be related to "sanctions" measures, but central bank gold purchases slowed in Q3, suggesting investor-driven activity might be the primary driver. Currently, Trump's tariff policies may place further pressure on Asian stock markets, a crucial element driving strong Chinese investor demand for Chinese gold this year. Furthermore, Republican fiscal policies are likely to fuel inflation: increased tariffs, addressing immigration, tax cuts, and lowering borrowing costs could all impact inflation figures. Simultaneously, excessive fiscal deficits will continue to pressure US Treasury creditworthiness, and concerns about fiat currencies would favor gold.

Retail Investors Take Profits Before Bitcoin Breaks $100,000

Bitcoin's price surge has been far more dramatic than gold's, but its extreme volatility has led speculators and traders to take profits. After all, Bitcoin, which was trading in the $70,000 range in early November, quickly jumped towards the $100,000 mark. "The Bitcoin halving, which occurs roughly every four years, is an event where the reward miners receive for verifying transactions is cut by 50%. This halving reduces the supply of newly mined Bitcoin, thus increasing its scarcity. If other market conditions remain unchanged, this usually drives up the price. This year, Bitcoin benefited from the dual tailwinds of the halving and Trumps return to power. Trumps lenient stance on cryptocurrencies is a positive for the market," the aforementioned miner told reporters. He also mentioned that the decreasing depth of Bitcoin bear market declines shows the market is maturing. For example, the bear market declines were -93% in 2011, -85% in 2015, -86% in 2018, and -76% in 2022. Furthermore, the post-halving Bitcoin rebound 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 and an increase in the proportion of long-term investors. Nevertheless, this cannot conceal the fact that the cryptocurrency market is prone to extreme speculation, with policy expectations serving as the primary driver of this wave of market activity. For instance, the market anticipates that a Trump administration might adopt more crypto-friendly policies, such as establishing a digital asset policy position and developing a regulatory framework for cryptocurrencies. "The current price is around $99,000, but the potential downside within a month could be as high as $30,000. Investors need to carefully assess the risks," the miner said.

Similarly, Matt Weller, Global Head of Research at FOREX.com, told reporters that the cryptocurrency "fear and greed" index reached 94, indicating "extreme greed," essentially the highest level ever recorded. Weller stated that another measure of market sentiment, based on the inflow of funds into exchange-traded cryptocurrency investment vehicles, remained near record highs last week. As of last Friday, Bitcoin ETFs alone saw a massive influx 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 its price. With Bitcoin testing the $100,000 mark, is this a profit-taking zone, or a stepping stone to prices above $120,000? At least for now, more people are choosing to take profits and wait. "After consolidating around $90,000 for a week, Bitcoin experienced a retaliatory breakout in mid-week, rising to a high above $99,000. Momentum and sentiment are clearly very bullish, but the question is whether the upcoming resistance levels at $100,000 (a psychologically important round number) or $102,000 (the 161.8% Fibonacci extension of the 2021-2022 correction) will trigger a round of profit-taking, especially given that the RSI shows a potential bearish divergence, although we need a price reversal to confirm the signal," Weller said. Whatever the case, although Bitcoin faces positive factors such as the halving and supportive policies, the market's up and down cycles have narrowed, meaning that both gains and losses could be faster and deeper. Furthermore, significant breakouts from prolonged consolidation periods often exceed expectations, so traders may need to be cautious about any contrarian trades.