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Gold's correlation with Bitcoin hits its highest level in a year

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(Kitco News) - The surging dollar and rising interest rates have had a variety of knock-on effects, including the collapse in the value of the British pound against the dollar, as global investors dumped assets in favor of the appreciating USD. 

As traders sold off assets like gold and to a lesser extent Bitcoin, the correlation between the two supposed inflation hedges has risen to its highest level in more than a year, according to a recent report from crypto market data provider Kaiko. 

With gold currently trading down 5.75% on the year, combined with the double-digit decline experienced by Bitcoin (BTC), the poor performance of the two has brought them closer in alignment with each other and has led to a current correlation coefficient of 0.3. 

Bitcoin’s correlation with gold. Source: Kaiko

“Over the past year bitcoin has been mostly uncorrelated with gold, with its correlation oscillating between negative 0.2 and positive 0.2. However, as the U.S. Dollar continues strengthening, negatively impacting both crypto and gold, the correlation between the two assets has shifted,” the report said. 

A correlation of +1.0 means two assets move in perfect synchrony in the same direction. 

This development comes as the top crypto had seen a more significant correlation with the S&P 500 for much of 2022, with the pair having a correlation of around +0.61 as of Sept. 30, according to data from CoinMetrics. That too is in the process of changing as Bitcoin has risen 3% over the past 90 days while the S&P 500 dropped 1%. 

While it's too soon to proclaim a ‘de-coupling between BTC and the equities market, its rising correlation with gold indicates that the market structure is beginning to shift. 

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Gold is likely to continue to see weakness amid rising rates due to an increase in the opportunity cost of holding an asset that doesn’t produce returns. 

According to Ole Hansen, head of commodity strategy at Saxo Bank, “Gold and the other semi-investment metals like silver and platinum will likely continue to remain under pressure until the market reaches peak hawkishness.”

Bitcoin has likewise been impacted, as its volatile nature has made institutional investors less optimistic about putting money into an unstable asset. 

It's possible that the fate of these two inflation hedges could soon reverse as central banks, including the Bank of Japan and the Bank of England, have once again turned on their money printers in an attempt to stave off an economic collapse. 

As for now, while the correlation between gold and BTC is still relatively weak, it's a trend worth keeping an eye on to get a better sense of the shifting landscape as the cracks in the global financial system continue to grow. 


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.