Gold Update: Shaking-out weak hands during multi-year bull-market

Gold has been under pressure since hitting All Time Highs (ATH) at $2063/oz. in August 2020. Some view the pull-back as a moment to question the investment outlook for the yellow metal. Many bitcoiners are jumping on the proverbial grave. In this piece I address those questions, compare the current pull-back to historical bull-markets, discuss the competition posed by bitcoin and reaffirm a constructive outlook on this asset class. TLDR: Bitcoin poses serious competition to gold, but it’ll take 4 to 8 years for traditional investors to transition their store of value focus away from gold. I’m primarily focused on bitcoin’s outsized potential, but I’m not throwing in the towel on the age-old store of value.


  • 15%-25% drawdowns are normal in gold bull-markets
  • Fundamentals remain supportive (rates and valuations)
  • Historical bull-markets support further gold gains
  • Bitcoin presents competition but unlikely to dominate just yet
  • Gold provides bitcoin diversification
Source: CoinCodeCap

Bull-Market Drawdowns

In the article “gold thesis intact after ATHs” (August 2020) I said, “I consider a 30% drop in prices unlikely given that the 2008 correction took place during the liquidity crunch of the global financial crisis. Nevertheless, it’s important to consider the potential volatility. A 10-15% correction is a more reasonable expectation after the massive run in the past 6 months. Mental preparation for downside volatility is important when investing into volatile speculative asset classes like gold.”

Gold has fallen 18% from $2063 to $1700, which slightly outside of the correction range. Pulling back the lens little further, I assessed the maximum gold price declines during gold bull-markets. According to monthly closing data, gold fell 21% during 1971-1974, 24% during 1976-1980, 26% during 1999-2001 and 18% during the current bull-market. In other words, corrections as deep as 20%-25% are possible during gold bull-markets so there’s nothing out of the ordinary here.

Despite the correction, the outlook for gold remains bullish

Real Interest rates are low and falling

Real interest rates are the strongest determinant of the gold price (XAU). Gold gains 1.7% m/m on average when US interest rates are low and falling. Not only is this regime the strongest for gold performance, but it outperforms other asset classes (the last three rows of the table show relative gold performance vs. the CCI, S&P500, Barclays Agg and US Cash respectively). Gold has gained relative to commodities (CCI), equity (S&P500), bonds (BarcAgg) and cash during these phases.

US real interest rates are currently low and falling. Central banks, led by the US Fed, are doing their utmost the devalue fiat currency. Obviously, this doesn’t predict precise gold price performance each month but, on average, these are favourable conditions for gold.

Relative valuation remains cheap

When traditional asset classes are cheap and long-term returns are encouraging, there is limited reason to hold gold. Intuitively we know that equities, bonds and cash haven’t become more attractive over recent quarters. My relative valuation measure confirms that gold is a long way away from bubble territory.

Early stages of gold bull-market

History suggests that there is a lot further to run yet in this bull-market. Gold tends to gain between 300% & 500% during bull-markets and has only gained 62% during this cycle.

Moreover, gold bull-markets are characterised by outperformance vs. equity. Gold tends to outperform the S&P500 between 400% & 600% but has underperformed by 13% during this cycle. I still expect gold to outperform equity before the current bull-market is precious metals is over.

So other than a pull-back from record highs, what is placing pressure on the gold price in the short-term and can it continue?

1) Longer dated real rates have risen slightly in recent months

I don’t think the Fed will allow long-dated rates to rise much. The last time developed markets held this much debt; US real interest rates went deeply negative.

2) Speculators are reducing longs

Both developments are interesting, but they aren’t signs of any fundamental change in gold markets or the macro world. If anything, this signals a clearing out of speculative long positioning, which is positive for future price action.

Beware, Bitcoin is potentially a superior technology

Bitcoin presents the biggest risk to gold over the coming 10 years. Bitcoin is likely a superior technology because it’s scarcer, digital, cheaper to store, easier to transport, more divisible and more accessible for the average investor. It’s also got a built-in digital payments network and developers work tirelessly on improving interoperability with merchants, banks and custodians across the globe. Bitcoin isn’t yet a currency in the means of payment sense, but you can use the infrastructure to convert instantly from BTC to USD and pay merchants, if you desire. Bitcoin also cannot be manipulated by central banks or banks, which is an eternal frustration for gold investors.

If you’d like to know about stock-to-flow, read THIS article

Over and above store of value, bitcoin invented digital scarcity, which is phenomenal. It could set-off the next technological revolution and lay the foundation for a different monetary regime so it’s not surprising that savvy investors are allocating capital to bitcoin. It remains the most asymmetric opportunity in financial markets today and its my #1 focus. It would be remiss of gold investors to ignore bitcoin. At a minimum, gold investors should mitigate against the competition risks with bitcoin exposure. Despite this perspective, I don’t think bitcoin will send a death nail into gold’s coffin for 4 to 8 years to come.
Yes, bitcoin’s price potential is higher than gold’s, but there are a few strong reasons why investors won’t merely ignore gold.

  1. Bitcoin is not fully regulated by all financial regulators in all regions of the world, so it presents challenges for some large institutions.
  2. Despite bitcoin’s attraction, many investors are scared by its volatility and would prefer to wait until volatility subsides.
  3. Most institutions cannot access bitcoin through their current investment process. They may lack the appropriate vehicle or custodian to link into their existing process.
  4. Bitcoin’s market capitalisation of $1tn implies some large institutions cannot invest large amounts into the asset class yet.
  5. Gold’s history implies that it’s the favoured store of value for traditional capital allocators who tend to be above 40 years of age.
  6. Bitcoin is only 12 years old so it relationship to other asset classes and the role it could play through various market cycles is uncertain.
  7. Gold’s physical properties have attraction to certain investors who want to look at and feel their investments.

None of these reasons is a death-nail to bitcoin. Nimbler institutions will overcome the regulatory barriers and capitalise on this once a lifetime opportunity to invest in a nascent asset class before large institutions. But I don’t think gold will be stagnant in 2020s merely because it faces competition from bitcoin.

Gold and bitcoin are uncorrelated

While there is certainly ideological competition between gold and bitcoin the correlation is weak. The data tells us that these are two distinct assets. They can play different roles from a portfolio construction perspective, benefiting portfolios at different times. Personally, I’m happy that gold provides a hedge against a concentrated bitcoin position.

Gold holds a place in portfolios, particularly for institutions

Gold’s 18% pull-back from record highs is not out of the ordinary and is unlikely to drive an extended price correction. Historical cycles suggest much more significant gains are possible for gold in the years ahead. The competition posed by bitcoin serious, but I don’t think bitcoin will draw all institutional demand from the yellow metal yet. Gold remains an important store of value and a critical component of portfolio construction, particularly for institutional investors who struggle to access bitcoin. Who knows, perhaps gold will present a good opportunity to reallocate towards if bitcoin gets very frothy in H2 2021.

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