Gold, considered a so-called safe haven in times of uncertainty, or bitcoin, which has become known as the gold of the new times due to its anonymity and limited supply? Following the Iranian attack on Israel, investors are going through a time of serious testing. Let us therefore consider which of these two assets is the better hedge in the event of an escalation of the conflict.
Table of contents:
- How did gold (XAU) and bitcoin (BTC) prices behave after the rocket attack on Israel?
- The outbreak of war in Ukraine and the price of XAU and BTC
- Are central banks preparing for war?
- Gold is not a good hedge for war?
- What can we expect in the coming months?
How did gold (XAU) and bitcoin (BTC) prices behave after the rocket attack on Israel?
Iran launched an unprecedented direct attack on Israel on Saturday night. Drones and long-range missiles were launched as retaliation for an alleged Israeli attack on the Iranian consulate in Damascus, where senior Iranian commanders were killed.
Following Friday's announcement of Iranian retaliation, the price of both assets (red line on the chart) - bitcoin and gold - fell dramatically. Bitcoin lost more than 5% by the end of Friday's session, while gold lost 2%. However, the attack itself occurred on Saturday evening, when the cryptocurrency market remains open. Shortly after the attack (blue line), bitcoin lost a further 7.7%.
Source: Tradingview
The outbreak of war in Ukraine and the price of XAU and BTC
During Russia's attack on Ukraine (24 February 2022), the price of gold rose by more than 8% over the course of a week. At the time, bitcoin fluctuated around its equilibrium after a temporary 16% increase. However, when the three-month period after the outbreak of the conflict is taken into account, both assets went under: gold lost just 2.5%, while bitcoin slipped by more than 20%.
Source: Tradingview
It appears that investors view bitcoin more as a speculative asset than a capital security. Consequently, when war breaks out, many investors go into a 'risk-off' state, leading to capital flight from riskier investments.
Are central banks preparing for war?
Currently, the United States has the largest gold reserves, holding as much as 25.4% of the world's gold reserves, followed by Germany with 10.5% and Italy with 7.6%.
Source: Conotoxia own analysis
Why is this important? Because the price of gold, like the price of any other asset, depends on supply and demand. In the case of the king of metals, however, supply is significantly limited, and the main buyers are primarily central banks, which have increased their appetite for gold especially in recent years. Historically, central banks have intensified their purchases of this bullion during periods of preparation for situations such as war or crises, in order to exchange it for weapons and other necessary resources during conflict.
Source: WGC
Gold is not a good hedge for war?
Since the release of the gold price in 1971, there have been 16 major armed conflicts. An analysis of bullion price movements in the 90 days following the outbreak of each shows that gold has not always been an ideal capital hedge. In only 44% of cases did it achieve a positive rate of return after three months. Despite this, the average rate of return over this period was 2%.
Source: Conotoxia own analysis
What can we expect in the coming months?
For both gold and bitcoin, the price is significantly influenced by investor expectations. Although BTC's price is currently linked to the coming halving, unexpected outbreaks of conflict have tended to negatively impact its price, which may suggest that the cryptocurrency is seen more as a risky asset than a hedge of investors' capital. Meanwhile, the price of gold has been rising mainly due to increased demand from central banks seeking a hedge for uncertain times.
Based on recent armed conflicts, it is difficult to conclude unequivocally that both gold and bitcoin can be a 'safe haven' during such events. The current rate of increase in gold prices is not significantly above its historical average of 7.5% per year for the past 50 years. The recent rises in gold prices are largely due to purchases by central banks, which are likely to continue. It is worth recalling that there have been seven years in this century when gold has gained more than 20% per year, not least during crisis periods. In light of the lack of factors negatively affecting the gold price and the possibility of an escalation of the conflict in Israel, a rise even above 20% this year seems likely. This could even mean breaking through the USD 2450 per ounce level.
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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