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Gold and bitcoin are touted as the “anti-dollar”, or in some people’s minds, possible replacements for the US dollar. Thus, one would expect the dollar-debasement trade to benefit gold and bitcoin similarly. The reality throughout this year has not been what many would expect. For example, gold is up over 50% this year, while bitcoin is up about 13% and slightly underperforming the S&P 500.
As we share in the screenshot below, the excess returns for bitcoin (IBIT), gold (BLD), and the US dollar index relative to the S&P 500 over consecutive periods are not what one would expect. For example, over the last five days, gold has fallen by almost 5% but bitcoin is up 2%. This same pattern, with one of the two assets up versus the market while the other is down, has held throughout the seven consecutive periods, totaling 245 trading days. We also share the relative performance of the US dollar index in the graphic.
If gold and bitcoin are perceived as the investment of choice in a true US dollar debasement, why are they not acting very similarly? This question leads us to an answer we have recently been giving on why gold prices are surging. Our answer is speculation, not fundamentals.
While the debasement narrative may seem strong, it has many holes as we have written recently- (US dollar Debasement & Money Supply Growth). Given our fundamental view, we find it highly likely that gold and bitcoin are not trading in sync because fast money is moving between the two, not into both simultaneously.
The divergence in returns suggests to us that speculative trading is playing a role in this year’s outsized gold returns. Be careful trading the narratives!
Overbought And Underperforming
Once again, the market is hitting record highs, and its breadth is far from ideal. The table below shows that on an absolute basis, about three-quarters of the stock factors are decently overbought. However, most are also oversold relative to the S&P 500. Presuming the bullish trend continues, we expect breadth to worsen further, as it has throughout the year.
It’s worth adding that technically, there are negative divergences between the S&P 500 and its MACD and RSI. Bad breadth and negative divergences have been consistently appearing this year. This certainly doesn’t mean the rally is ending, but it does mean we need to keep paying close attention to our risk measures. More simply, it’s not a time to get complacent. Yet at the same time, the situation doesn’t support meaningful risk reduction either.