A Surprising Reason (Among Others) Why Bitcoin is Outperforming Gold

By John Banks

If you own gold, you are likely satisfied with the yellow metal’s annual performance thus far. As of Oct. 29, the gold price was up more than 25% year-to-date, as determined by Comex gold futures. GLD, the popular gold ETF, was up a tad less at just under 23%.

Bitcoin, however, has blown past gold like it was standing still. By the same Oct. 29 reference point, Bitcoin (as priced in U.S. dollars) was up nearly 84% year-to-date — more than triple the performance.

What’s more, gold seems to have stalled out a bit, whereas Bitcoin is still powering higher.

Gold’s high point for the year (thus far, at least) came 12 weeks ago, at $2,063 per ounce on Aug. 6, and the gold price is about 10% below that now.

Bitcoin, on the other hand, made a brand-new, multi-year high less than 72 hours ago, at $13,743 on Oct. 27, and might be hitting new highs again even as you read this.

So why is Bitcoin crushing gold in performance terms right now? It is a slightly odd disconnect when you think about it. The dominant use case for Bitcoin is often expressed as “digital gold,” in the sense Bitcoin has a sovereign store-of-value function comparable to gold.

Because the use case is related, and Bitcoin is competing for a chunk of gold’s market share, one might expect the Bitcoin price and the gold price to move more in tandem, rather than Bitcoin leaving gold in the dust in terms of price appreciation.

This partly has to do with the institutional world’s late discovery of Bitcoin, and the one-time journey Bitcoin will take on its way from a market cap below $250 billion to a cap in the multiple trillions.

For Bitcoin to take even a modest percentage of gold’s market share, in terms of private investor holdings and central bank reserves, the Bitcoin price will have to rise by a factor of 10, if not more. In the early years of such a rise, there will be periods of extreme upside velocity. 

Then, too, the respectable banking houses of Wall Street are doing a 180-degree turn on Bitcoin.

On Sept. 12, 2017, JPMorgan CEO Jamie Dimon publicly called Bitcoin a “fraud” that was “worse than tulip bulbs.” Dimon further said that, if any JPMorgan employee attempted to trade Bitcoin, he would “fire them in a second” for being “stupid.”

That was three years ago. Now, in October 2020, JPMorgan analysts are hyper bullish on Bitcoin.

“Even a modest crowding out of gold as an ‘alternative’ currency over the longer term would imply doubling or tripling of the bitcoin price,” says a new JPMorgan research report, adding that “the potential long-term upside for bitcoin is considerable as it competes more intensely with gold…”

So, JPMorgan was arrogantly dismissive of Bitcoin, from the CEO on down, and now they have seen the light and are endorsing its advance.

This is exactly what we said would happen. And we started saying it in the summer of 2019 — within months of Bitcoin’s long-term bottom — pounding the table hard enough to break it.

The following TradeSmith Decoder excerpt is from July 2019:

In the future world we anticipate, gold will become a staple of institutional asset allocation. The eventual world we foresee could have every institutional investor, as a manner of social signaling and accepted conventional wisdom, have something like 5% to 10% of their total portfolios allocated to gold and gold-related investments.

At the same time, these institutional investors will (in our future projections) want a smaller, but still significant, level of exposure to Bitcoin, as the price appreciation for BTC in the coming years could produce investment returns too fantastic to be ignored…

If this scenario more or less unfolds — again over a long period, perhaps the better part of the 2020s — then gold’s market cap goes to $30 trillion or more, Bitcoin’s market cap rises into the multi-trillions as part of its historic journey to becoming a full-fledged store-of-value asset class, and BTC as a long-term investment fulfills the potential we see.

Long story short, we not only saw this coming, we described exactly how the institutional world would start to behave, in terms of shifting toward a Bitcoin allocation stance. Everything is happening now, just as we foresaw, except on a rapidly accelerated timetable because of the pandemic.

As we have said before, if you don’t believe in Bitcoin yet, you will. The only question is how long it will take before the final pieces click and you “get it.” JPMorgan now gets it. 

So Bitcoin is outperforming gold now, in part, because the BTC market cap will have to increase by at least an order of magnitude to reach full maturity as a store-of-value competitor to gold, and the institutional community, along with the broader retail community, is finally waking up to this.

But there is yet another reason gold’s performance is lagging behind Bitcoin heading into year-end: Central banks have become net sellers of gold in order to raise cash.

“Central banks became gold sellers for the first time since 2010,” Bloomberg reported on Oct. 28, “as some producing nations exploited near-record prices to soften the blow from the coronavirus pandemic.”

According to data from the World Gold Council, central banks were net sellers of 12.1 tons of gold in the third quarter of 2020. This was a big shift from a year earlier, when central banks were net buyers to the tune of 141.9 tons. Russia’s actions were particularly notable, with Russia’s central bank posting its first net sale of gold in 13 years.

Central banks are not selling gold because they are bearish, or because they think the gold price is too high, but rather because they need cash. Russia, in particular, depends on oil revenues to fund its budget, and the oil price is stuck at multi-year lows.

The good news for gold is that central bank demand is expected to rebound in 2021, and the total gold supply continues to shrink. Bloomberg reports that total new gold supply was down 3% year-on-year, even with mines fully reopened after pandemic-related shutdowns.

At the same time, new mining projects are becoming ever-harder to bring online, as attractive sites grow scarce, regulations get tighter, and environmental opposition gets fiercer.

In TradeSmith Decoder, we remain extremely long-term bullish on precious metals stocks (though Bitcoin is our largest position by far, and will likely remain so).

While gold is experiencing sluggish performance as of this writing, it will almost certainly get up and go. And yet, if you are holding gold but not Bitcoin, and feeling like you are puttering along in a Ford Fiesta that just got blown out by a Porsche 911 Turbo, you aren’t wrong.

Not owning Bitcoin — in at least some modest allocation, if not a large amount — is a recipe for regret, and that regret will only intensify in the months and years to come.