Forget bitcoin, why it might be time for gold to shine

Bitcoin shaved off almost a third of its value overnight. Here’s why gold could be back on the table thanks to the crashing crypto price.

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Rising ASX share price represented by smug investor with gold dollar around neck.

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In the sea of red across cryptocurrencies including bitcoin, stocks and commodities, gold has been one of few assets standing tall this week.

The Bitcoin (CRYPTO: BTC) crash is making headlines today, with the leading cryptocurrency sliding as much as 30% to intraday lows of US$30,000 overnight. Cryptocurrencies across the board from Ethereum (CRYPTO: ETH) to meme-inspired Dogecoin (CRYPTO: DOGE) marked losses as steep as 50% amidst China’s hard stance on cryptocurrency and account liquidations.

While cryptocurrency might arguably the gold of the modern era, here’s why it might be time for gold to shine.

Why its time to take a second look at gold

Its been a rather uneventful year for gold up until this month.

Looking back, the yellow metal staged a record-breaking rally last year from pre-COVID levels of US$1,650 to US$2,075 for the first time on record. Coupled with a plummeting Australian dollar / US dollar which reached lows of less than 60 cents, ASX gold miners were raking in cash, quite literally.

After reaching its peak of US$2,075 by early August 2020, gold has struggled to find headway. But after bouncing off lows of US$1,680 in both March and April, there are a number of factors that could put the topic of gold back on the table.

Dumping Bitcoin for gold

Analysts at J.P. Morgan Chase have reported that large institutional investors are dumping Bitcoin in favour of gold. The investment bank pointed that the sudden crash in Bitcoin has coincided with new inflows into the yellow metal.

JP Morgan cited open interest data in Bitcoin futures contracts, saying:

The Bitcoin flow picture continues to deteriorate and is pointing to continued retrenchment by institutional investors. Over the past month, bitcoin futures markets experienced their steepest and more sustained liquidation since the Bitcoin ascent started last October.

Rising inflation vs. rising yields

Rising inflation erodes the purchasing power of fiat money. Gold is commonly viewed as an inflation hedge, as its price tends to rise when the cost of living increases. More recently, the US recorded a surge in inflation to 4.2% in April compared to a year ago. The expectation that higher inflation is here to stay, could be a driving factor behind the renewed interest in gold.

However, working against rising inflation could be higher yields. Since gold doesn’t pay any dividends, higher yields typically push the gold price lower. Coinciding with gold’s selloff between August 2020 and April 2021, US 10-year treasury yields more than tripled from 0.50% to a high of 1.76%. On Wednesday, treasury yields once again edged 2.50% higher to 1.68%.

Despite treasury yields ticking higher overnight, gold has marked a sixth session of strong gains, from US$1,815 last Thursday to US$1,870 at the time of writing.

Foolish takeaway

The ASX is home to some of the world’s largest and lowest-cost gold producers including Evolution Mining Ltd (ASX: EVN)Northern Star Resources Ltd (ASX: NST) and Newcrest Mining Ltd (ASX: NCM).

While Bitcoin might continue to behave in a whipsaw like action, gold has steadily made its way back up to a 5-month high this week.

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Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Bitcoin. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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