Yesterday, Federal Reserve Chairman Jerome Powell held a speech to talk about inflation and the impact on the economy. During Powell’s speech, the two top hedges against inflation pumped, then almost immediately dumped, faking out investors prepared to act on the bullish breaking news.
Comparing the price action between the two assets, the correlation is “uncanny” claims one well-known analyst. But what exactly does this mean for Bitcoin and gold?
Inflation Rate Allowed To Run Over 2% Prompts Pump From Hard Assets
In 2007, when the Great Recession first hit, measures were taken to prevent the economy from spiraling into a devastating collapse.
Although the Great Recession ended officially by July 2009, monetary policy was never tightened back up. Instead, the Federal Reserve and Central Banks kicked the can down the road for another generation to deal with.
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But then the pandemic hit, forcing the US to once again take extreme measures to prevent economic disaster. The Federal Reserve has added trillions of dollars in assets to its balance sheet.
As a result, to keep debt from getting more out of control than it already is, Fed Chairman Jerome Powell revealed that the inflation rate would be allowed to go over the normal rate of 2% per year.
This means that the government is forcing individuals to pay back this government debt by way of decreasing buying power, rather than taxing the wealthy to offset the impact of overspending.
For those that don’t understand what this means: an account with $100,000 is worth $100,000 now. If left alone for 25 years, even though it remains $100,000 in fiat, it now has the buying power of what $50,000 does today at the 2% inflation rate.
So where do investors store their wealth? The answer is Bitcoin and gold, and the two assets pumped in the most uncannily correlated way during Powell’s speech, giving credence to the cryptocurrency acting as digital gold.
Bitcoin = digital gold
Uncanny correlation during J-Pow's speech. pic.twitter.com/rAeGHtohjL
— Mati Greenspan (tweets ≠ trading advice) (@MatiGreenspan) August 27, 2020
Bitcoin and Gold Share Uncanny Correlation As Safe Haven Assets React To Hyperinflation
If investors can’t store their wealth in cash, the global reserve currency, without watching its value be debased decade after decade, then where do they turn?
For most of history, investors turned to gold: the original safe-haven asset and store of value. When the dollar first decoupled from gold in the 1970s, the asset was priced at just $35 an ounce. Thanks to inflation, that same ounce of gold trades for almost $2,000.
This is because while more dollars can be printed, and debt created that must be paid back through inflation, gold has a finite supply. Gold has been trusted for centuries for this reason, but there is no telling exactly how much supply is beneath the earth’s surface or beyond it.
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Bitcoin, however, also has a scarce limited supply – yet the total supply in the cryptocurrency is known and transparent for all.
These qualities are why investors have turned to gold and Bitcoin as a hedge against inflation. These investors were prepared for a big boost of bullish momentum stemming from Powell’s big reveal.
They got what they were looking for, but were met with a fakeout, or perhaps a shakeout before the real move upward. Gold and Bitcoin have been on a strong uptrend, and with inflation back in the spotlight thanks to Powell’s speech, the two assets could start shining again.
Bitcoin and Gold Powell Speech Pump and Dump | Source: TradingView
The abrupt, correlated move took place the moment Powell’s speech started. Both assets pumped, then almost 15 minutes later, dumped back down and below where they started.
This type of move could be viewed as either a fake-out to the upside before a move down, or perhaps a shakeout move before new highs are tapped.
Whatever is next for the two assets, inflation running rampant will keep the two hard assets with limited supplies in high demand for some time to come.
Featured image from Deposit Photos.