Last Thursday, I showed you two reasons why gold and Bitcoin are both making new highs.
Gold is up 5% this year, to a near-record high of $2,160.
Bitcoin has broken through its previous high of $67,600. It’s up 149% since I recommended it to my Distortion Report readers back in May.
And I believe both assets still have more room to run. So today, let’s break down three more reasons behind these rallies.
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Growing Commercial Mortgage Loan Bank Risk
Recent turbulence in the regional banking arena has catalyzed prices for gold and Bitcoin.
New York Community Bancorp (NYCB) was thrown a $1 billion lifeline last week from a private equity investor group led by former Treasury Secretary Steve Mnuchin.
But that capital injection might not be enough to stop mounting losses in its $11 billion loan portfolio. Plus, as we’ve written, NYCB isn’t the only struggling regional bank.
Bank risk is caused by various factors, such as reckless lending practices, debt delinquencies and defaults, and possible bankruptcies. All of these remain in play.
During times of financial instability, investors seek safe haven assets to protect their wealth against potential bank risks. We saw this when gold rallied in the wake of the financial crisis of 2008 and after the Covid pandemic.
Gold also offers an alternative to central bank monetary systems that bail out banks. Its non-printable, physical nature provides long-term stability during periods of banking system stress.
Bitcoin was born in the wake of the financial crisis. It also provides a hedge against bank risk. That’s because it isn’t tied to the centralized Federal Reserve or other central bank policies that have fostered bank failures.
Unlike the dollar, Bitcoin operates through a peer-to-peer network. Its decentralized nature makes it hard for governments or banks to control it. This reduces the impact of government policies or bank failures on its price.
I believe we’re facing a growing commercial bank loan crisis. As more banks buckle under the weight of bad commercial loans, Bitcoin and gold will be seen as a hedge to that risk.
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Economic Uncertainty and Geopolitical Turmoil Are Rising
Economic uncertainty is another factor driving gold and Bitcoin’s rally. People struggling with economic insecurity are seeking alternative investments to help bolster their income.
Last week, the U.S. Bureau of Labor Statistics reported that the February unemployment rate rose 3.9% vs. the expected and prevailing rate of 3.7%. That’s higher than it was pre-Covid.
Unemployment and layoff rates are rising, and so is debt. U.S. households are now paying roughly as much interest on other kinds of debt, from credit cards to student loans, as on their mortgages.
Non-mortgage interest payments climbed to an annual rate of $573.4 billion in January. That’s the highest on record, even after adjusting for inflation.
Supply chain disruptions and geopolitical tensions have increased economic uncertainty globally. That’s because they distort the costs of commodities from oil to aluminum.
Plus, currencies can become volatile and lose their value during geo-political turmoil. Central banks and multinational companies can use gold as a hedge against currency fluctuations because its price can’t be controlled by centralized institutions.
Gold has historically been considered a safe haven during times of geopolitical crisis.
Bitcoin is similar. Government-imposed capital controls or currency restrictions can limit money flow between countries.
But Bitcoin operates outside of the traditional financial system, so it’s not subject to the same regulations. This means it can provide protection against capital controls and currency restrictions to allow funds to move across borders.
That means it’s less affected by geopolitical risks or instability within any one country or region.
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Institutional and Retail Diversification
Central banks increased their gold holdings in January 2024.
The central bank of Turkey bought the largest stash of gold. China’s central bank increased its gold reserves for the sixteenth month in a row. India bought more gold. The Czech National Bank bought gold for the eleventh straight month.
According to the World Gold Council, central banks cited store-of-value, currency and geopolitical crisis hedge, inflation hedge, and diversification as key reasons for their ongoing gold purchasing.
Meanwhile, investors’ allocation to gold is at twelve-year highs. And I believe recent upward price movements will only enhance this asset allocation composition.
I predict we will see proof of that once we see March gold ETF inflows. These will show ongoing momentum in gold purchasing as asset allocation. More momentum pushes up demand and price.
As for Bitcoin, the SEC gave it a significant rubber stamp that has contributed to its momentum in portfolio diversification. On January 10, the SEC approved Bitcoin ETFs.
Since then, the total trading volume in Bitcoin ETFs has topped $100 billion. Meanwhile, total assets under management sit above $50 billion. That shows solid flow plus liquidity.
Investors are realizing that gold and Bitcoin can complement each other in a diversified portfolio. This perception shift has ignited demand from retail and institutional investors.
More demand drives prices higher.
What This Means for Your Money Today
In short, we are seeing a strong confluence of all of these events.
The acceleration of each of them is combining to push the prices of gold and Bitcoin further upward.
The best way to take advantage of this is to buy physical gold, even if it’s something like a thin gold chain. Or to invest in Bitcoin through a secure exchange or an ETF.
We have discussed the best ways to do this before. Catch up on those essays here, here, and here.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins