Friday's Market Minute: Gold Shines While Crypto Is Confused

Gold continues its bullish run. It keeps forming a series of higher highs and higher lows, which is typical in a bullish market. If these technical conditions remain in place, momentum and directional bias may push it towards $2,000. On the other hand, the crypto community is divided on how to digest the latest bitcoin crumble, falling as much as 30% at one point on Wednesday to as low as $29,000.

From a purely technical standpoint, the price action this week is a continuation pattern that began mid-April, and the near-term structural risks to Bitcoin remain to the downside. Some are attributing the crash to China's crackdown on crypto transactions, Tesla's recent decision to stop vehicle purchases with bitcoin, and even shifting allocations by institutional investors that have swapped their bitcoin positions for gold. For bullish crypto investors that are thinking long-term, this week’s price rout might actually have been a great opportunity. For the bears, a more than 50% decline from the highs within a month is damage that cannot be undone until bitcoin demonstrates a period of low volume, tame volatility, and price consolidation.

Gold is being supported by structurally negative U.S. yields and a weak U.S. dollar. It is an effective hedge against inflation and serves the role of portfolio protection. Bitcoin has recently been called an inflation hedge, even though its role is not yet fully understood in the market and its asset classification is still developing. It is not a fully-developed currency that serves the role of medium of exchange, unit of account, and store of value. The high volatility of cryptos makes them an unreliable store of value.

However, one could also make the case that any fiat currency eventually suffers long-term debasement of value. Weekly moves of more than 10% in bitcoin are common, but for any currency outside a sudden policy-induced devaluation, such dramatic moves are much more uncommon. Bitcoin is neither a commodity, nor does it have the liquidity of cold hard cash that is accepted by both the private and public sector. With fear of inflation, concerns over equity valuations, uncertainty of pace of economic recovery, and the manifestation of doubts over a gradual Fed balance sheet taper, gold’s place is better understood.

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