Why Gold and Bitcoin Are Gaining—and Why the Rallies Won’t Last

It’s a bit curious. For one, inflation pressures are starting to recede, so there shouldn’t be a compelling case to buy them as a hedge against rising prices. Gold and bitcoin also tend to get a boost during times of significant dollar weakness, but the U.S. Dollar Index is up more than 2% this year, though it’s relatively safe to call it trendless.

Of course, the recent launch of spot bitcoin ETFs is a major reason behind the crypto surge. Easy access to bitcoin for retail investors through funds from top money managers like BlackRock, Fidelity, and ARK Invest has led to big inflows, pushing bitcoin prices ever higher. But that certainly doesn’t help explain gold’s climb, and may not be enough for bitcoin’s either. “I’m not sure if the bitcoin ETFs are the only reason for the crypto surge,” says John Norris, chief investment officer with Oakworth Capital Bank. “And when you see gold above $2,100, you have to wonder if something else is going on.” 

Norris points to the “general angst” about global events, such as the Russia-Ukraine war, Israel-Hamas military conflict, and recent attacks by Yemen’s Houthis on cargo ships in the Red Sea, as contributors to the twin rallies in gold and bitcoin. “You have to wonder if the spike in gold and bitcoin is more about discomfort around global affairs,” Norris said. “It’s a culmination of people feeling more uncertain about the world around them.”

Gold and bitcoin may have even more room to run because of these geopolitical worries. John Roque, senior managing director of 22V Research, called gold “the king of agita” in a Tuesday report, and recommends investors “trust the current thrust.” He has a $2,444 price target on gold, about 15% higher than current levels.

Central banks are making a bigger bet on gold, too, which is helping push the metal higher. According to data from the World Gold Council released Tuesday, Turkey, China, and India made sizable purchases, adding more than 30 metric tons to their reserves in January. “There is a lot in play right now, says Joe Cavatoni, senior market strategist for the Americas at the World Gold Council. “The geopolitical concerns have led to a more complex landscape and a broader case for gold.” 

Still, some worry that both gold and bitcoin may soon lose some of their luster. A dovish Fed has been one of the most obvious reasons for gold’s strength, says David Russell, global head of market strategy at TradeStation, but it’s no longer clear when the first-rate cut from the Federal Reserve is going to occur. It wasn’t too long ago that traders were banking on easing in March, but now there are questions about whether the Fed might wait until later this summer to cut—if it all in 2024. “A dovish Fed is the most obvious catalyst for [a] gold bull,” Russell says. “Rate cuts may not happen as quickly as people think.”  

Bitcoin also faces a problem beyond the economy, interest rates, and the dollar. An event known as a halving is set to take place sometime in April. That means that the rewards for mining new bitcoin are cut in half. Some crypto experts have argued that the anticipation of the looming halving event, combined with the new bitcoin ETFs, has helped lead to the enormous price surge in bitcoin this year. But there could be a reckoning after the halving, according to analysts at
JPMorgan,
who argue that bitcoin prices may plunge to $42,000.

Don’t take our word for it. Gold-mining and crypto stocks have been volatile of late, underscoring how risky it is to bet on either the precious metal or bitcoin. Bitcoin miners Riot Platforms and Marathon Digital have tumbled from recent highs. So have
Coinbase
and big bitcoin holder MicroStrategy. And even though gold miners have rebounded recently along with gold prices, the
VanEck Gold Miners ETF,
which owns Newmont, Barrick Gold, and other top mining stocks, is down more than 2% this year and is down 20% from its 52-week high.

So investors need to tread carefully. Bitcoin and gold—and the stocks tied to these two assets—are not for the faint of heart.

Write to Paul R. La Monica at paul.lamonica@barrons.com