Bitcoin, Gold May Be Sensing Monetary Debasement as Records Beckon

So far this year, gold has seen a remarkable increase of 27% and has outperformed its 2020 growth of 25%. It’s important to note that the last time it performed even better was back in 2007. What could be fueling this impressive surge?

Historically, gold has been regarded as a safe haven during times of monetary devaluation and global unrest, and recent economic circumstances appear to be reviving this function. The recent spike in gold prices can be traced back to these factors. Interestingly, gold started its upward trend prior to the massive monetary devaluation caused by the Covid pandemic in 2020, while bitcoin gained prominence towards the end of 2020 and into 2021. As bitcoin currently stands at 14% below its record high, is it attempting to match its past performance once more?

Upon a detailed analysis, it appears that Bitcoin’s value often correlates with the Federal Reserve’s net liquidity indicator. This indicator is determined by deducting the reverse repo rate and the Treasury General Account from the Fed’s total assets, suggesting that Bitcoin generally follows liquidity fluctuations.

In late 2022, both Bitcoin and overall liquidity hit their lowest points around the same time as the FTX crash. However, since that incident, Bitcoin has been on a gradual upward trend, mirroring an increase in total liquidity that currently stands above $6 trillion.

Currently, the Federal Reserve’s balance sheet stands at approximately $7.1 trillion. Despite continuing with quantitative tightening, the rate at which this is happening has been diminished. The failure of Silicon Valley Bank (SVB) in March 2023 resulted in a significant drop of around $1.6 trillion on the balance sheet, bringing it back to sizes similar to those during the early stages of quantitative easing implemented post-pandemic.

Reducing the reversed repurchase agreement balances, currently standing at around $300 billion, puts more cash flow back into the economy. This move is stimulating, as it enhances the accessibility of funds for loans, investments, and general economic actions.

Glancing at a wider perspective, the consolidated financial statements of the 15 most significant global central banks (which comprise the U.S., EU, Japan, and China) collectively amount to approximately $31 trillion.

Although the figure itself isn’t the main point, it’s worth noting that there’s been a worldwide surge in central bank balance sheets, rising from approximately $30 trillion in July. This growth in liquidity is notably beneficial for Bitcoin, as its value often follows liquidity patterns.

Additionally, it was announced on Wednesday that the Federal Reserve reduced interest rates by half a percentage point, which could potentially boost the value of Bitcoin and Gold.