Bitcoin Is Stealing Gold’s Thunder, One Analyst Finds

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Bitcoin has been siphoning demand from gold in recent months, and that could put a lid on gold prices this year, argues Citigroup analyst Aakash Doshi.

Citi cut its six- to 12-month gold price target to $1,950 an ounce, down by $150 from its prior projection. Gold is trading around $1,800 and has fallen about 5% this year. There are several reasons that Doshi thinks gold may lag behind in 2021.

Although gold can be a hedge against inflation, and some analysts see inflation ticking up this year, Doshi thinks that the Fed will be more aggressive in tamping it down. He says that there is an “increasing risk” of the Fed tapering its monetary policy by the fourth quarter, and that the Fed will step in more aggressively in 2022 and 2023. In addition, Doshi expects investors to rally to commodities like oil instead of gold to play an economic recovery.

But investor flows — toward crypto and away from gold — may play the biggest role, in his opinion.

“The most palpable reason gold investment activity may have flipped to net outflows in recent months seems to be an expanding investor base if not an outright preference by some institutional players for digital alternative assets,” he wrote. Bitcoin is up 84% this year, and its total market value recently rose above $1 trillion.

Bitcoin is sometimes referred to as digital gold, and some investors consider it a hedge against inflation like gold because the supply is capped. The Bitcoin market still trails the gold market, whose total above-ground value is about $12 trillion.

It’s difficult to make an apples-to-apples comparison between gold and Bitcoin, because the products available to trade them are different. There is no Bitcoin exchange-traded fund in the U.S. Doshi used the

Grayscale Bitcoin Trust

(GBTC), a private placement that trades as a security, as his proxy for institutional Bitcoin demand. Its assets under management have risen about $30 billion since mid-October, even as gold ETFs have seen $11 billion in outflows, he noted.

“More interestingly, in the last 19 weeks, gold ETFs and Bitcoin posted net weekly flows and asset under management trends in opposite directions on about a dozen occasions,” he wrote.

The total investable asset base for both Bitcoin and gold have grown in the past two years, making it appear even more likely that investors are rotating their portfolios on the margins, he wrote.

The World Gold Council, a market development organization backed by gold miners, cautions that cryptocurrencies have different roles in an investor’s portfolio so it is not clear that one is a substitute for the other. Bitcoin, for one thing, adds more risk to an investor’s portfolio even if it may serve the purpose of being a hedge against inflation.  

Juan Carlos Artigas,
head of research at the council, cautioned that “we shouldn’t confuse correlation with causation” when it comes to comparing flows of investor money.

While he acknowledges that some gold ETFs have seen outflows, “some of the low-cost gold ETFs continued to gather assets” this year.  

“It’s not appropriate to just look at two specific figures that are combining different statistics and conclude that the trend is wider,” he said.

In some cases, investors have said in recent months that they like both assets. Billionaire investor
Stanley Druckenmiller,
for instance, said last year that he had bought some Bitcoin, but that he still owns quite a bit more gold.

Write to Avi Salzman at avi.salzman@barrons.com