Gold and Bitcoin make fresh record highs, as stocks pause

The market mood may be pensive at the start of the new week, but not for alternative assets, which are the centre of the action. Gold and Bitcoin both made fresh record highs on Monday. The spot gold price reached a high of $2,189 on Monday morning, before pulling back as we lead up to lunchtime in Europe. There seems to be no stopping Bitcoin, which currently remains at the highs of the day above $71,000. The original crypto currency has risen by nearly $21,000 since the 26th February.

When gold and bitcoin rise in unison, it is worth interrogating the reasons behind this, in case they can give us clues about investor behavior. Both seem to be rallying on the back of the overall market mood: US, Japanese and several European indices have made fresh record highs recently. However, for gold and bitcoin there are other internal factors at play that could be pushing up their value even when stocks take a breather.

Gold, the ultimate inflation hedge, faces a key test

Gold is the world’s oldest inflation hedge, and it is no wonder that it is rallying as we lead up to the US CPI report. The Fed has said that they are data dependent, which means that even one month of data matters for market sentiment in the current environment. Added to this, the Fed is in ‘blackout mode’ ahead of next week’s FOMC meeting, so a lot hinges on Tuesday’s CPI report for February. When the market is worried about inflation not falling back to the Fed’s target rate of 2% quickly enough and the Fed potentially cutting rates too soon, gold is an obvious asset choice, since it is considered a store of value and a hedge against inflation. The market is pricing in a rate cut from the Fed in June, on the back of a rising US unemployment rate and signs inflation is moderating, but what if those signs are wrong?

The gold price may have rallied 5% last week, but Tuesday’s US CPI data is a key test of how far the gold price can rise. If we get a weaker than expected reading of US CPI, then we could see sentiment towards gold change direction.

Bitcoin rallies as stocks falter

Bitcoin also has its own internal drivers. As we have mentioned in previous notes, there is a ‘halving’ taking place, possibly in April, which is a quirk of the formula that governs Bitcoin, which is designed to be a finite asset. The halving will reduce the amount of bitcoin that can be mined by half, and in past ‘halving’s’, the price of bitcoin has tended to rally.

Other factors are also driving Bitcoin, for example there has been $10bn poured into the Bitcoin ETFs that launched earlier this year, and there are signs that a small allocation to alterative asset classes like bitcoin are worthwhile for longer term investors and institutional investors. We think that these two factors, along with a supportive macro backdrop, relatively strong market sentiment and the prospect of interest rate cuts from the Fed are also helping to propel Bitcoin higher.

The rally past $71,000 is also helping crypto-related stocks to move higher. Coinbase Global and MicroStrategy are higher by 4.6% and 6.4%, respectively, MicroStrategy is the largest corporate holder of Bitcoin. Miners are also doing well, with Cipher Mining and Hut 8 Mining both higher today. Looking forward, we could see gold falter and Bitcoin may continue to rally later this week, as we believe Bitcoin’s price is less impacted by macro data and the US inflation reading than the gold price.

Where stocks may go next

Looking ahead to the US open, S&P 500 futures are predicting a small decline when markets open today, however, Nvidia is poised to open higher. The market is currently pricing a 1.6% gain for the stock, which fell 5.5% late on Friday. There was no single catalyst for the decline in Nvidia, which dragged the rest of the Magnificent 7 lower, and weighed on overall market sentiment. However, there were concerns that the rapid rise in prices was looking like bubble territory. Nvidia is up by more than 77% so far this year, and the S&P 500 has made 16 days of record highs so far this year, which is about a third of all trading days. When this happens, a pullback is expected.