Bitcoin is dragging down gold's fair value by $158 an ounce - CrossBorder Capital
(Kitco News) - After months of consolidation, the gold market is finally finding some traction as prices push to nearly a two-month high. Some analysts have noted their frustration with the yellow metal as it has seen a dismal performance since the start of the year, even as inflation pressures have steadily risen.
Many analysts have noted that one significant reason for gold's lackluster performance this year is the precious metal's growing competition with digital currencies, particularly bitcoin, which continues to trade near record highs.
U.K.-based research firm CrossBorder Capital remains extremely bullish on gold as central banks continue to flood global financial markets with liquidity. However, they noted that bitcoin's growing acceptance has reduced the precious metal's long-term fair value.
"We calculate that the existence of Bitcoin has probably reduced the 'fair value' of gold by US$158/oz. given that liquidity is now spread a tad more thinly over these two combined stores of value," the analysts said in a report Wednesday. "Looking ahead, we can conjecture that the revised 'fair value' gold price, based on liquidity, is correspondingly US$2,527/oz."
While CrossBorder Capital is bullish on gold, they also see both assets' potential to work together. The analysts noted that if gold prices continue to hold at current levels, then with all the liquidity sloshing around bitcoin's long-term fair value could be around $341,250 per coin.
"We stress that this is not a prediction… well, at least not yet," the analysts said. "But it might seem prudent for an investor who is concerned about monetary inflation to hold one unit of Bitcoin for every nine units (by value) of gold as a better hedge."
Although gold is traditionally seen as an inflation hedge, the analysts said that investors should look at it more as a hedge against excess liquidity in financial markets, which is created by central banks' monetary policies.
The firm noted that central banks had pumped nearly $10 trillion into the financial system since the start of the COVID-19 pandemic. Taking the bitcoin drag out of the equation, the analysts said that gold prices should be well above $2,000 an ounce with all this liquidity.
"Looking ahead, the future outlook appears far rosier according to the liquidity-based model. It projects gold bullion prices testing US$2,685/oz. Over the next 12 months, after incorporating the accumulating monetary surge associated with the COVID Crisis and shown in Figure 2. In contrast, the real interest rate-based model suggests only a modest further uplift of its current US$2,150/oz. target," the analysts said.