Are The Bitcoin ETFs Eating Gold’s Lunch?

Photograph taken indoors of a gold Bitcoin coin and a pile of gold on a dark surface.

At the 2024 Investment U Conference in Ojai, California, Bitcoin and gold were the talk of the town. As a presenter at the event, I heard whispers that a major financial institution had suggested to their wealthy clients that they allocate 2% to 3% of their portfolio to Bitcoin. Although I cannot verify this rumor, there are reports that both Bank of America and Wells Fargo have started offering Bitcoin ETFs to some of their high-end customers, following in the footsteps of Charles Schwab, Robinhood, and other firms.

During the month of February, the value of Bitcoin skyrocketed by over 45%. The majority of these gains were made in the last week, as people eagerly awaited the release of spot Bitcoin ETFs. These ETFs were highly in demand and caused a frenzy of activity, resulting in the combined daily trading volume of 10 different ETFs reaching a staggering $7.7 billion in just one day. This surge in activity came from a lot of institutional investors taking speculative positions and leveraged bets on the asset, which ultimately led to the price of Bitcoin almost reaching an all-time high.

The number of transactions happening for Bitcoin ETFs located in the spot market rose to almost $8 trillion.

Surprisingly, by February 29th, the combined value of U.S. Bitcoin ETF holdings totaled about 50 percent of all the gold ETFs that are known. Bitcoin ETF trade began in January and currently has $43.2 billion in holdings, whereas gold ETFs have holdings valued at $92.3 billion.

The scale of Bitcoin ETFs is approximately 50% of the size of physical gold ETFs.

Right now, there is a noticeable contrast in feelings between cryptocurrency and gold. The Crypto Fear and Greed Index from CoinStats is currently showing a lot of Excessive Greed, yet the Gold Fear and Greed Index from JM Bullion is only registering as Neutral. This illustrates just how much more excited people are about cryptocurrency compared to gold.

Risk Vs. Reward: Two Assets' Story

As you may be aware, I frequently suggest investing 10% of your portfolio in gold. This allocation should be divided into two parts, with half of your investment going towards physical gold such as coins, bars, or jewelry. The other half should be invested in high-quality gold mining stocks, mutual funds, or ETFs. In my opinion, this allocation is appropriate for most investors who are looking for an asset that isn't linked to the stock market's performance. This is especially true for cautious investors who might not have a long-term investment strategy.

If you're an investor who isn't in a hurry to see profit or you're willing to take on more risk, then Bitcoin might be a good option. Compared to gold, which is similar in some ways, Bitcoin's fluctuations are about eight times larger. Gold usually has a deviation of ±3% over 10 days, while Bitcoin's deviation is usually ±25%.

While it's not always certain, taking on more risk can sometimes lead to higher rewards. In the past six months ending in February, the value of Bitcoin went up by over 100%, almost reaching 130%. On the other hand, the value of gold only went up by around 5% during the same time period. Additionally, major gold companies, as tracked by the NYSE Arca Gold Miners Index, lost 9%.

In the world of investments, Bitcoin has shown remarkable success surpassing traditional assets like gold.

It is not known if the increasing enthusiasm about Bitcoin is affecting the demand for gold, but there seems to be some difference in the way its value is changing and how much people are investing in it. In the past, the price of gold and the amount of gold held in ETFs usually moved together, but from 2023 they apparently stopped doing so, as shown in the graph below. Various things could have contributed to this, such as shifts in people's attitudes towards investing, government financial decisions, the need to adjust investment portfolios, changes in exchange rates, and other factors.

The value of gold-backed ETFs has become independent from the price of gold.

Gold Up, Miners Struggle To Grow Cash Flow

Experts at U.S. Global Investors examined a group of 85 gold mining companies and discovered that, as a whole, the financial state of the sector declined in 2023 despite gold experiencing a successful year with a growth rate of over 13%.

From our research, it was found that out of the 85 names analyzed, only 47, which accounts for approximately 55% of the basket, had a positive free cash flow (FCF) yield as of December 31, 2023. This is similar to what was observed a year ago, when 48 gold producers had a positive FCF.

We discovered similar outcomes when we looked at the sales growth in relation to the fluctuations in gold prices. During the period of December 2022, it was found that 23 out of the basket of 85 gold miners exhibited favorable FCF outcomes, coupled with a rise in sales that exceeded the increase in gold prices within the past 12 months. However, after a year, this number dwindled to a meager 10, making up roughly only 12% of the entire basket.

This indicates that less than 10 percent of gold miners experienced a positive change in their financial situation... even though the cost of gold increased within the same year.

There are several reasons why the younger generation is not interested in investing in gold stocks, which is unfortunate for the companies involved. Currently, there is a significant wealth transfer on the horizon, with $84 trillion set to be inherited by beneficiaries over the next 20 years. To address this, more gold producers could learn from Bitcoin miners and consider holding gold on their balance sheets.

Are Central Banks Considering Bitcoin Investment?

As I told you before, some people who keep an eye on the market, like us, think that the thing that makes the price of gold go up or down seems to have changed in the past few months. For a really long time, the price of gold would go up when interest rates went down, and vice versa, but this hasn't been happening since the pandemic started in 2020. Before the pandemic, gold and interest rates tended to have a really strong negative relationship over 20 years. But since then, the relationship has become positive, so now the two things usually go up or down together.

Back in January, BMO Capital Markets discussed how purchasing gold is now being driven by central banks. It's difficult to oppose this idea. Banks, particularly those in developing nations, have been purchasing more gold since 2010. They do this to back up their currencies and expand their holdings away from the American dollar.

Last week, Edward Snowden made a prediction about 2024. He stated that a government will eventually be discovered buying Bitcoin in secret. Snowden refers to Bitcoin as the new replacement for gold in the monetary system. His statement is worth considering.

It's really amazing to note that the treasury of the government of El Salvador has stored 2,381 bitcoins at present. Nayib Bukele, the country's president, has revealed that the recent price hike has boosted the value of these holdings by 40%. However, he also clarified that the government has no plans to sell these bitcoins. Interestingly, El Salvador and the Central African Republic (CAR) are the only two countries that have legalized bitcoin as a form of legal tender.

The amount of difference for a group is shown through standard deviation. The Gold Fear and Greed Index looks at different types of information like the price of gold, how people are talking about gold online, and how much people are buying gold. The Crypto Fear and Greed Index considers volatility, social media comments, surveys, and how well the market is doing. The NYSE Arca Gold Miners Index is a weighted list of companies that work in mining for gold and silver. These companies are traded publicly.