Gold and glitter in 2020: bitcoin is correlating with physical gold prices

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The same forces that support gold support bitcoin, but the crypto's offer is more limited. Adoption remains the default metric, and our indicators remain positive.

Morgan Stanley, JP Morgan and Goldman Sachs attribute the positive sentiment around gold to three main factors:

• the potential devaluation of the US dollar

• the uncertainty surrounding the economy

• the rising demand for physical gold

Dollar devaluation

Lisa Shalett of Morgan Stanley Wealth Management expects the dollar to approach its peak. She writes that if the value of the dollar falls, it will be beneficial to add gold to your portfolio.

"The dollar may approach a peak. As the dollar weakens, this may be a good time for some investors to consider adding some gold to their portfolios. "

But whether the US dollar will fall in the short term remains uncertain. The USD continues to dominate international financing markets, according to the Bank of International Settlements.

Economy uncertainty

Goldman Sachs analysts say uncertainties surrounding the recovery of the economy will drive investors towards gold:

"Gold demand tends to grow in the early stages of an economic recovery, driven by persistent debt problems and lower real interest rates . "

Shalett recognizes it:

"Some investors may feel they have to allocate less money to stocks if the chances of a recession increase, which could lead to a buffer of gold."

JP Morgan writes the same in a note to their clients. In early May, the bank's strategists said investors could view gold as a hedge against economic uncertainty.

There are many variables that can cause a decline in both the economy and the stock market. High unemployment, declining business productivity and fears of a second wave of the pandemic could cause the economy to collapse. The perception that gold is a safe haven makes gold preferable to cash and bonds.

Physical gold

Strategists also predict that the demand for physical gold will increase. Gold is used in various products, such as jewellery and electronics. The disruption of the supply chain, especially in areas where no gold is produced, can cause a shortage. Nicholas Thompson of Morgan Sanley:

"Increasing demand for physical gold in times of increased uncertainty, coupled with supply disruptions, can often increase the cost of purchasing these products, as seen during COVID-19 -crisis.'

Bitcoin adoption in 2021

And what about bitcoin? Since early 2020, institutional investors have been buying large amounts of bitcoin through the Grayscale Bitcoin Trust. Grayscale buys a lot of bitcoins and can therefore serve many institutional customers. This fund is one of the few ways for US investors to invest in bitcoin.

Bloomberg writes in the same report that there is an increasing correlation between bitcoin and gold:

"Increasing correlation with gold is good for bitcoin. Bitcoin is increasingly becoming a digital version of gold, and 2017 can repeat itself for a longer period of time. Unless gold goes down, bitcoin is likely to peak. "

A confluence of increasing institutional adoption and the demand for gold could lead to a resurgence of bitcoin in 2021.