Bitcoin and Gold: A Dual Relationship in the New International Monetary System

Recently, the global capital markets have experienced significant volatility, the appreciation of the yen has triggered changes in carry trade, the panic index has soared, and even gold has seen a slight pullback due to liquidity shocks. Bitcoin has also experienced a sharp decline along with risk assets. This seems contradictory to its "twin" nature, but we still believe that with the accelerated evolution of the new International Monetary System, the twin relationship between Bitcoin and gold will further strengthen.

Since 1970, gold prices (relative to the US dollar) have experienced three major upward cycles. The 1970s were a true "golden era," with gold appreciating against the dollar by more than 17 times at its peak. After the Bretton Woods system collapsed, the dollar was detached from gold, and the purely credit-based dollar depreciated relative to gold. At the same time, two oil crises and tense geopolitical situations drove the demand for gold as a safe haven. After the 1980s, gold prices entered a period of consolidation and weakened in the 1990s, which was related to the control of global inflation and the recovery of economic growth.

The first decade of the 21st century was the second round of the upward cycle, with the price of gold against the US dollar rising more than 5 times at its peak. After the burst of the internet bubble, growth slowed down, and China's accession to the WTO triggered inflation expectations, while the subprime mortgage crisis and the European debt crisis prompted developed countries' central banks to initiate large-scale quantitative easing policies, pushing down real interest rates and enhancing the attractiveness of gold. After 2010, with the strengthening of the US dollar and the Federal Reserve tightening policies, gold entered a consolidation period again.

We are currently in the third round of the upward cycle, which began in 2019, and the price of gold against the US dollar has nearly doubled. This round of increase can be divided into two phases: from the end of 2018 to the beginning of 2022, affected by Sino-US trade frictions and the COVID-19 pandemic, countries adopted loose monetary policies, and real interest rates quickly declined; from 2022 to now, despite the US raising interest rates to combat high inflation, leading to an increase in real interest rates, the price of gold has still risen by over 30%.

Traditional economics posits that gold prices are negatively correlated with real interest rates, but this relationship has changed in the post-pandemic era. Gold prices have deviated from the pricing framework of real interest rates, reflecting a response to the transitional period of the new International Monetary System. Essentially, this signifies an enhancement of the "consensus" regarding the monetary attributes of gold, as well as a defensive diversification against the credit system of the US dollar.

Central banks and the private sector around the world are increasing their gold reserves to diversify away from the dollar risk. The net purchases of gold by central banks surged from 255 tons in 2020 to 1037 tons in 2023. The holdings of gold ETFs in Asia have also significantly increased, reflecting the private sector's expectations regarding the evolution of the International Monetary System.

Bitcoin shares several characteristics with gold, such as scarcity, decentralization, forgery resistance, divisibility, and convenience. In January 2024, the U.S. SEC approved the listing of the first Bitcoin ETFs, marking a further move of Bitcoin into the mainstream. Recently, the positive correlation between Bitcoin and gold prices has significantly increased, suggesting that it may be transitioning from a high-risk asset to a "commodity coin."

The future International Monetary System will enter a new stage, with a clear trend towards diversification of reserve currencies. Against the backdrop of rising global inflation and increasing geopolitical uncertainty, gold is still in the mid-term of an upward cycle. It is worth noting that the diversification of reserve currencies is occurring not only at the national level but also in the private sector. As Bitcoin accelerates its mainstream adoption, its value as a reserve currency is expected to go hand in hand with gold, playing an important role together in the new International Monetary System.