Inflation Anxiety

I read the other day that there's a rotation out of gold and into Bitcoin. I found the claim strange, considering the recent surge in search interest for gold. This doesn't look like an environment in which people drag their physical gold to market in order to swap it for something as speculative as crypto.

I concluded that the ones swapping gold for crypto are traders in derivatives rather than physical gold, and it appears that I was right. This article in the German financial paper Handelsblatt notes that interest in physical gold is up on the year while interest in derivatives are down.

The author adds that this trend, while particularly strong in Germany, is global. Traders are abandoning their derivatives in gold, while savers are adding to their physical holdings. Savers are flocking to physical gold for inflation protection. They are not buying crypto, which is increasingly the domain of traders.

This rotation has the short term effect of suppressing the gold price, because derivatives are sold in larger nominal values than physical metal is bought. However, this will do little to push the price of crypto higher, because traders are likely to buy the derivatives rather than the underlying asset. These derivatives are not settled in crypto, and are as a consequence relatively inert when it comes to setting prices.

The wedge formation in the gold chart is thus explained. The rotation in derivatives is keeping a lid on the price to the upside, while physical demand is setting a floor to the downside. There's a battle of sorts between traders in derivatives and savers in physical, and we're nearing a conclusion.

If current inflation anxiety subsides over the short term, we might see a price drop below the wedge that will take months to repair. However, if central bankers fail to relieve people's anxiety, we'll soon see the price of gold starts on it next leg up.

Rococo Cup with handle

By Vincennes Porcelain (France, circa 1739–1756), Francois Binet (France, active 1750-1775, born 1731) - Image: http://collections.lacma.org/sites/default/files/remote_images/piction/ma-31852871-O3.jpg Gallery: http://collections.lacma.org/node/229367 archive copy, Public Domain, Link