Gold and Bitcoin in the Reform of the Global Currency System

Recently, the global capital markets have experienced extreme volatility, with the appreciation of the yen triggering a reversal in carry trades, the VIX index soaring, and even gold experiencing slight corrections due to liquidity shocks. Bitcoin has significantly declined along with risk assets. Although this seems contradictory to the "twin" properties of gold and Bitcoin, we still believe that as the new international monetary system evolves more rapidly, the twin relationship between Bitcoin and gold will become even closer.

Since 1970, the price of gold (against the US dollar) has gone through three major upward cycles. The 1970s were the real "golden age," with the maximum increase of gold against the dollar exceeding 17 times. During this period, the Bretton Woods system collapsed, the dollar was unpegged from gold, and coupled with two oil crises and geopolitical tensions, highlighted gold's value preservation and hedging properties. After the 1980s, gold prices entered a period of consolidation, weakening in the 1990s, which was related to global inflation being brought under control and economic growth recovering.

The first decade of the 21st century was the second round of the rising cycle, with the maximum increase in gold prices exceeding 5 times. During this period, the burst of the internet bubble, China's accession to the WTO triggering inflation expectations, as well as the outbreak of the subprime mortgage crisis and the European debt crisis, prompted central banks in developed countries to initiate quantitative easing policies, driving down real interest rates and enhancing the appeal of gold.

We are currently in the third round of an upward cycle that began in 2019, with gold prices having risen nearly 100% to date. This cycle can be divided into two phases: from the end of 2018 to early 2022, influenced by China-U.S. trade frictions, global economic downturn risks, and the COVID-19 pandemic, countries significantly eased their monetary policies, driving gold prices up by about 50%. From 2022 to now, despite the U.S. rapidly raising interest rates to combat high inflation, gold prices have still risen by over 30%.

Traditional economics believes that the price of gold is negatively correlated with real interest rates, but this theory seems no longer applicable in the post-pandemic era. The trend of gold prices reflects more the expectations during the transition to a new international monetary system, essentially strengthening the "consensus" around the monetary attributes of gold, and serves as a defensive diversification against the dollar credit system.

Central banks and the private sector around the world are increasing their gold reserves to diversify away from the dollar risk. From 2020 to 2023, global central banks' net gold purchases surged from 255 tons to 1,037 tons. The private sector, especially in non-Western countries, is also increasing its gold holdings.

Bitcoin has many similarities with gold, such as scarcity, decentralization, incorruptibility, divisibility, and convenience. In January 2024, the SEC approved the first Bitcoin ETF to be listed in the United States, marking Bitcoin's further move into the mainstream. In recent years, the positive correlation between Bitcoin and gold prices has significantly increased, suggesting that it may be transitioning from a high-risk asset to a "commodity currency."

The future international monetary system will enter a new phase, with a clear trend towards diversification of reserve currencies. Against the backdrop of rising global inflation and increasing geopolitical uncertainty, gold remains in the mid-term of its upward cycle. It is worth noting that the diversification of reserve currencies is occurring not only at the national level but also with active participation from the private sector. As the mainstreaming of Bitcoin accelerates, its value as a reserve currency is likely to rise alongside gold, playing an important role together in the new international monetary system.