We have seen some big swings in gold and Bitcoin since New Years. Gold initially rallied last week then turned down, while Bitcoin soared. In fact it has gone up so much that I’m seeing random people on my Facebook friends list who don’t trade markets or post about them talk about Bitcoin.
I also have gotten emails from people asking me if the rise in Bitcoin is causing gold to drop.
The answer is no.
The reason why I can say that with confidence is that you can mathematically measure the relationship between different things in the market and whether or not they influence each other. It’s called a price correlation.
Check out this chart of gold with the correlation indicators on the bottom of it.
I’m running the correlation of gold and the US dollar index, the TLT bond ETF, and Bitcoin on the bottom of this chart using their 200-day moving averages. When this indicator is close to 1.00 it means the two things being measured are trading perfectly instead with one another and when it is negative 1.00 it means they are trading in complete opposition – when one goes up the other goes down.
The closer to zero the indicator is the more random the price relationship is between the two things being measured, meaning there is no relationship. In March we saw wild volatility in the markets that caused just about everything to go down so you have to look at the correlations now, which have returned to normal for them.
Gold has a negative 0.75 relationship with the US dollar, which is what it historically has. When the dollar goes down gold tends to go up. Meanwhile the relationship with TLT is near 0 and Bitcoin is at 0.36. That means the relationship between gold and Bitcoin is not a negative one.
Bitcoin going up therefore does not hurt gold, nor do rising bond yields as bonds fall in value really impact gold in a meaningful way.
What is influencing gold is the fact that the dollar fell so much going into New Years that it go extremely oversold, much like it did going in August and bounced in the past few days.
The RSI indicator for the US dollar index fell below 30 in December and its daily stochastics indicator also went below 20. These are both momentum indicators that screamed oversold. The oversold condition is not as extreme as it was in August, but the dollar is now in the process of working it off by going sideways again.
That is what held gold down last week. It means that gold is likely to remain range bound for now. That still makes for a good time to buy the best mining stocks. Check out my stock pick of the month for example.
I do not expect we’ll see the dollar rally much from here. It’s deep in a strong downtrend in a bear market now and when currencies bounce in such a situation they typically just go sideways for a few week before turning lower again with very little upside. Maybe the US dollar index can get to its 50-day moving average.
As for Bitcoin, it’s strongest correlation is with the Nasdaq 100.
Bitcoin goes up when the Nasdaq goes up enough to excite the masses into taking bigger risks like going on margin or piling into speculative stocks and then when the stock market has a correction Bitcoin crashes. Buying Bitcoin is essentially like buying call on the Nasdaq. If you can trade that and get out before it tops that’s good. But it is difficult to hold as a normal investment.
Yesterday was an overall down day for the markets, but one sector that stood out were energy stocks, which were up. I talked about them in a post last week and one shipping stock that managed to do well yesterday again too.
In case you missed it I talked about gold with Jordon Roy-Byrne of www.thedailygold.com in this video update from last week.
-Mike
