Bitcoin and Gold Correlation Turns Negative, Approaching 3-Year Lows with Tapering Looming Ahead

Bitcoin is keeping above $45k after surging past $46,800 on Wednesday, still up more than 57% YTD. The digital asset hasn't seen these levels since mid-May, which further gives strength to the 200-day moving average as a potential support level.

BTC has been strong despite the less-than-huge inflation data coming in this week. In July, the Consumer Price Index for All Urban Consumers (CPI-U) rose by 0.5%, on par with the consensus prediction by economists.

Even the core index, which excludes food and energy prices, jumped 4.3% for the 12 months through July compared to 4.5% for the same period through June. Analyst Mati Greenspan wrote in his daily newsletter Quantum Economics,

“The thing is… bitcoin isn't really a hedge against inflation. Its price doesn't react to inflation data like the rest of the market does, at least not in real time. However… I can see how people might not want to hold dollars in a bank account right now.”

Much like digital gold, precious metal, the traditional safe haven, also rose over 4% in the last three days to reach almost $1,756 per ounce. However, gold’s gains came after its flash crash to $1,687, from $1,832 on August 4th.

Gold is currently down 7.51% YTD and is in a loss this month and quarter by 3.37% and 0.52%, while bitcoin is up 8.90% and 29%, respectively, per Skew.

Interestingly, with this move, the one-year correlation between gold and bitcoin has fallen into the negative territory and is reaching the lows last seen in 2019.

On the macro front, tapering could affect both the assets and discussion has already started around this. On Wednesday, Dallas Federal Reserve President Robert Kaplan said the central bank should begin paring its purchases in October. Kaplan said,

“It would be my view that if the economy unfolds between now and our September meeting … if it unfolds the way I expect, I would be in favor of announcing a plan at the September meeting and beginning tapering in October.”

Fed Chair Jerome Powell has not yet given a forecast for when they will pull back the economic stimulus, which involves $120 billion worth of monthly purchases of Treasury bonds and mortgage-backed securities to keep banks and other lenders flushed with cash.

According to Kaplan, with economic activity and employment now healthier, he is conformable to “take the foot off the accelerator soon.” He said the tapering process should take about eight months, and the eventual move to raise interest rates to be separate from it.

Meanwhile, Richmond Fed President Thomas Barkin said it might take a few months for the job market to recover enough to reduce the support. “We are closing in … I don’t know exactly when that will be,” said Barkin, who's not ready to commit to a timetable yet but think, “we will get there in the next few months.”

Just this week, Atlanta Fed President Raphael Bostic said he is eyeing Q4 for the start of tapering. He has already penciled in late 2022 for the start of rate hikes. Factoring in the more progress still needed in the labor market puts the start of trimming purchases between October and December and even earlier.

For Boston Fed President Eric Rosengren as well, tapering standards for employment could potentially be met by September, and he is in “favor of going relatively fast.”

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