The correlation between gold and other investment vehicles may be extending to other asset classes. Traditionally, gold only had an inverse correlation with currencies and other high-risk investments, because the precious yellow metal is seen as a safe haven asset class. However, recent historical data shows that gold seems to be inversely correlated with Bitcoin as well.
In an interview CNBC, RBC Capital Market’s Chris Louney has pinpointed a rising correlation between gold prices and Bitcoin. Louney said that finding a correlation was challenging since Bitcoin is still considered as a fledgling asset class.
“It’s very hard to really put your hands around a tangible correlation between Bitcoin prices and gold prices for most of the history,” said Louney.
However, something changed during Bitcoin’s highest rally at the end of 2017.
“Towards the end of last year, we started to notice that correlation turned at least mildly negative.”
Considering Bitcoin’s prices from November 2017 to February 2018, which rose to $19,000 but then sharply declined to $8,000, the correlation between the two assets was at -0.68.
When checking for a correlation coefficient, a positive correlation coefficient would be at 1, while 0 means there’s no correlation at all. Meanwhile, a -1 shows that there’s an inverse correlation between the two assets. The -0.68 rating proves Louney’s theory that Bitcoin and gold has a mildly-negative correlation.
After Bitcoin started to crash at the start of 2018, Louney said that he hasn’t observed any changes to Bitcoin and gold’s relationship. He states that the inverse correlation could even widen as Bitcoin’s popularity progresses this year. FXCM states that gold is still widely bought in order for investors to diversify the risks of incoming inflation or economic events that may negatively impact their holdings. In February, gold prices soared due to a weak U.S. dollar as well as the falling value of Bitcoin.
Not a safe haven asset
RBC Capital Markets’ data shows that Bitcoin may not be the new safe haven asset class just yet. Financial firms have long disputed this assumption, saying that intangible assets can never be compared to precious metals.
Goldman Sachs is one of the most vocal financial firms that are against the motion that cryptocurrencies are the new gold. The financial company asserts that precious metals will always remain a relevant asset class in portfolios.
In a note to its clients last year, Goldman clearly detailed the perks of having exposure to gold.
“The use of precious metals is not a historical accident – they are still the best long-term store of value out of the known elements,” said Goldman. “Gold wins out over cryptocurrencies in a majority of the key characteristics of money.”
Goldman adds that unlike gold, cryptocurrencies are vulnerable to threats of regulation. In China, a ban on cryptocurrency exchanges immediately put a halt to the propagation of Initial Coin Offerings (ICO).