Home / Markets / Mark To Market /  Crypto crash to support gold prices, say experts

MUMBAI: The fall of cryptocurrencies from their glory has been a swift one. After giving skyrocketing returns in recent months, cryptocurrencies such as Bitcoin, Ethereum, Ripple and Dogecoin have had a free fall, losing around 30% of gains in just one week. This sudden turn of events has given gold bulls some hope. Investors would reckon that the rising popularity of cryptocurrencies as a store of value was being seen as a threat to gold as an investment asset class. Global gold prices surged to a three-month high of $1,890 per ounce intraday on 19 May. This was in a reaction to the 19% decline in the Bloomberg Galaxy Crypto index on that day.

“The steep correction in cryptocurrencies has led to asset rotation to gold. We expect this to extend support to global gold prices. Gold prices have largely been consolidating in the past many months, this event is a sentiment positive for the yellow metal. Besides, mounting inflation concerns are also a positive trigger for the precious metal. That said, a significant up move in global gold prices is still some time away, we expect gold prices to catch-up with other commodities, which are currently in the super cycle mode," said Sugandha Sachdeva, vice president - commodity & currency research, Religare Broking Ltd.

In a latest note to clients, analysts at JP Morgan Chase said large institutional investors were dumping bitcoin in favour of gold.

That said, those in the speculative trading community, who are attracted by the superlative returns of cryptocurrencies, are unlikely to switch to gold, which has given relatively lower returns. In fact, such traders are likely to see this correction in cryptocurrencies as an opportunity to buy.

According to analysts at Mauldin Economics, Bitcoin has drawn billions of assets away from gold and in recent weeks, gold and Bitcoin have been negatively correlated, as Bitcoin has gone down, gold has gone up. "Bitcoin has proven that it is no store of value, after being so easily manipulated by a temperamental billionaire, in an elaborate pump-and-dump scheme. You can’t do that to gold—it’s simply too big," said their latest blog.

This week's steep fluctuation in cryptocurrencies was fuelled by an announcement by Space-X founder and Tesla CEO Elon Musk which expressed concerns about carbon emissions while mining Bitcoin. Contrary to his earlier promise, Musk said his electric cars cannot be purchased with Bitcoin. This was followed by The People's Bank of China banning the use of cryptocurrencies.

On the flipside, minutes of the recently held US Federal Reserve meeting hint towards a possible scaling back quantitative policy considering the bounce-back in the US economy. Commodity analysts caution that this would weigh on precious metal which has been among the key beneficiaries of the ultra-accommodative stance of global central banks.

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