The Evolution of the Relationship Between Bitcoin and Gold

Recently, the global capital markets have experienced significant volatility, with the appreciation of the yen triggering changes in carry trades, the VIX index soaring, and even gold being slightly adjusted due to liquidity effects. Bitcoin has also seen a sharp decline alongside risk assets. Although this seems contradictory to the "twin" attributes, the accelerated evolution of the new international monetary system will still promote further integration of Bitcoin and gold.

Since 1970, the price of gold (in US dollars) has undergone three major upward cycles. The 1970s were a glorious period for gold, with prices increasing more than 17 times. The collapse of the Bretton Woods system, the decoupling of the dollar from gold, along with two oil crises and geopolitical tensions, highlighted gold's value preservation and safe-haven properties. After the 1980s, gold entered a consolidation phase and weakened in the 1990s, which is related to global inflation being brought under control and the recovery of economic growth.

The first decade of the 21st century was the second round of the bullish cycle, with gold prices rising more than five times at their peak. The bursting of the internet bubble, China joining the WTO, the subprime crisis, the outbreak of the European debt crisis, and the quantitative easing policies of central banks in developed countries all contributed to this rally. After 2010, as the US dollar strengthened and the US began to taper QE and raise interest rates, gold entered another consolidation period.

The third round of the upward cycle began in 2019, and the price of gold has nearly doubled since then. However, compared to the previous two cycles, there is still room for time and price increase. This round of increase can be divided into two stages: from the end of 2018 to the beginning of 2022, affected by China-US trade frictions, global interest rate cuts, and the pandemic, the price of gold rose by about 50%; from 2022 to now, despite the US interest rate hikes leading to an increase in real interest rates, the price of gold has still risen by over 30%.

Traditional economics holds that the price of gold is negatively correlated with real interest rates, but this relationship seems to have broken down in the post-pandemic era. The true value of gold lies in "consensus," and its monetary attributes are strengthening, reflecting a defensive diversification against the dollar credit system. Central banks and the private sector worldwide are increasing their gold reserves to respond to changes in the international monetary system.

Bitcoin has many similarities with gold, such as scarcity, decentralization, non-falsifiability, divisibility, and convenience. With the SEC approving the first batch of Bitcoin ETFs, Bitcoin is further moving into the mainstream. Recently, the positive correlation between Bitcoin and gold prices has significantly increased, suggesting that it may be transitioning towards "commodity currency."

Before the establishment of a new international monetary system, the trend of diversifying reserve currencies will continue. The upward shift of the global inflation center and increasing geopolitical uncertainties will also support the rising cycle of gold. It is noteworthy that the diversification of reserve currencies is not only occurring at the national level, but the private sector is also undergoing this process. As Bitcoin accelerates its mainstream adoption, its value as a reserve currency is likely to develop alongside gold.