Gold and Bitcoin: Price Volatility and Market Sentiment Under the Trump Effect

Gold and Bitcoin: Price Volatility and Market Sentiment Under the Trump EffectRecently, the price movements of gold and Bitcoin have captivated global markets. After a significant ~10% correction following Trump's election, gold prices have rebounded for five consecutive days the first such streak since March successfully breaking above the 50-day moving average ($2664)

Gold and Bitcoin: Price Volatility and Market Sentiment Under the Trump Effect

Recently, the price movements of gold and Bitcoin have captivated global markets. After a significant ~10% correction following Trump's election, gold prices have rebounded for five consecutive days the first such streak since March successfully breaking above the 50-day moving average ($2664). An unexpected escalation of geopolitical conflicts further accelerated this gold price recovery. Although the market generally believes that a strong dollar, high inflation, and a relatively moderate foreign policy under Trump's administration might weaken gold's appeal, major Wall Street investment banks are calling for "buying the dip." Goldman Sachs, for instance, maintains its forecast of a $3000 gold price by December 2025, citing sustained central bank gold purchases and the potential for interest rate cuts as supporting factors.

Meanwhile, Bitcoin has also exhibited strong upward momentum. News of Trump's election initially propelled Bitcoin's price to near $98,000, a hair's breadth from breaking the $100,000 barrier, representing a year-to-date gain of nearly 130%. At the Bitcoin2024 conference, Trump pledged to fire current SEC Chair Gary Gensler on his first day in office if elected. He criticized Gensler's stringent regulatory policies toward the crypto industry, arguing they stifle American innovation in cryptocurrency and harm US global competitiveness.

However, in recent months, many traders investing in Bitcoin ETFs and BITX (a 2x long Bitcoin ETF) have begun taking profits. A veteran miner told reporters: "Miners are hesitant to sell their machines this year. Bitcoin halving occurs approximately every four years, reducing the supply of newly minted Bitcoin. While everyone anticipates the $100,000 milestone is just a matter of time, after such a sharp rise, many prefer to take profits and wait to see the specific situation after Trump's inauguration in January."

Gold: Institutional Accumulation and Market Correction

In the first week of November, gold prices initially hit a record high at the beginning of the month before retracting. Spot gold prices fell from near their all-time high of $2800 to the $2500 range, a short-term drop of nearly 10%, one of the largest declines in recent years. The World Gold Council explained the price decline, stating that its Gold Price Action Model (GRAM) attributes the drop primarily to: a strengthening US dollar; lagging momentum factors; outflows from gold ETFs; and a decline in net long positions held by COMEX managed money, likely due to the unwinding of hedging positions ahead of the election.

Approximately $809 million (12 tonnes) in global gold ETF outflows were estimated during the first week of November, with North America experiencing the largest outflows, although strong inflows from Asia partially offset this. This may signal renewed concerns about a resurgence in Sino-US trade tensions. Furthermore, COMEX net holdings also decreased by 8% (74 tonnes) compared to the previous week. The World Gold Council stated: "The US election results objectively curbed gold's year-to-date surge. This may be due to persistently strong bond yields and the US dollar, increased equity risk appetite, the flourishing cryptocurrency market, and an easing of geopolitical tensions. These factors may have pressed pause, or even triggered a healthy short-term correction, on the gold rally that the market had been eagerly awaiting."

However, many overseas investment banks and asset managers interviewed by reporters still favored buying the dip, previously suggesting that $2400 and $2500 might represent the bottom of the correction. The recent unexpected escalation of the Russo-Ukrainian conflict spurred a rapid rebound in gold prices. It is widely believed that future risks will not diminish significantly. Goldman Sachs believes that the role of commodities in portfolios is increasingly diversified, and long positions in gold and oil are particularly important, acting as key hedges against inflation and geopolitical risks in extreme scenarios, such as escalating tariffs (gold), geopolitical disruptions to oil supply (oil and potentially gold), and debt concerns (gold). UBS, in its New Year outlook, also pointed out that gold, while slowing, remains a winner. Central bank and retail gold demand remains strong as they seek portfolio diversification. Even with a slowdown, it will be a commodity winner, while investor enthusiasm for copper will be dampened by weak economic growth.

Although the US dollar index recently approached 108, the World Gold Council believes that gold's price has become less sensitive to US Treasury yields and the US dollars movement lately. During October and much of 2024, the majority of gold's returns were generated during Asian trading hours. Some of these purchases may be related to "sanctions" measures, but central bank gold purchases slowed in Q3; thus, it may be investor-led. Currently, Trump's tariff policies may put more pressure on Asian stock markets, a major factor behind strong Chinese investor demand for gold investment this year. Furthermore, Republican fiscal policies could likely trigger inflation: tariffs, immigration responses, tax cuts, and reduced borrowing costs could all influence inflation figures. Simultaneously, excessive fiscal deficits will continue to put pressure on US Treasury credit, and concerns about fiat currency could benefit gold.

Bitcoin: Retail Profit-Taking Before the $100,000 Milestone and Market Sentiment

Bitcoin's rally has been far more spectacular than gold's, but the intense volatility has led speculators and traders to favor profit-taking. After all, Bitcoin, which was trading in the $70,000 range in early November, quickly surged towards the $100,000 mark. "Bitcoin halving, which occurs approximately every four years, is an event where the reward miners receive for verifying transactions is reduced by 50%. Halving reduces the supply of newly minted Bitcoin, thereby increasing its scarcity. If other market conditions remain the same, this usually drives up the price. This year, Bitcoin benefited from the double boon of halving and Trump's ascension to power. Trumps lenient stance on cryptocurrency is positive for the market," the aforementioned miner said.

He also mentioned that the decline in bear market drops for Bitcoin is narrowing, indicating a gradual market maturation. For example, the bear market drop was -93% in 2011, -85% in 2015, -86% in 2018, and -76% in 2022. Additionally, the rebound in Bitcoin after halving is also beginning to narrow, with the current rebound at 42%, lower than the 53.3% and 122.5% seen after the previous two halvings. Reduced volatility reflects a maturing market and an increasing proportion of long-term investors.

Nevertheless, this doesn't mask the fact that the cryptocurrency market is prone to extreme speculation, with policy expectations being the dominant driver of this recent rally. For example, the market anticipates that a Trump administration may adopt more crypto-friendly policies, such as creating a digital asset policy position and establishing a regulatory framework for cryptocurrencies. "The current price is around $99,000, but the potential downside within a month could be as high as $30,000. Investors need to carefully assess the risks," the miner stated.

Matt Weller, Global Head of Research at FOREX.com, also stated that the cryptocurrency "Fear & Greed" index reached 94, indicating "extreme greed," essentially the highest level ever recorded. Weller noted that another measure of sentiment, the inflow of funds into exchange-traded crypto asset investment vehicles, remained near record highs last week. As of Friday, Bitcoin ETFs saw a massive influx of nearly $3 billion in just the past four days. In the long term, the inflow of funds from "traditional finance" investors provides incremental demand for Bitcoin, helping to support its price.

Bitcoin's test of the $100,000 markis this a profit-taking zone, or a stepping stone to $120,000+? At least for now, more people are opting to take profits and wait and see. "After consolidating around $90,000 for a week, Bitcoin saw a retaliatory breakout mid-last week, rising to above $99,000. Momentum and sentiment are clearly very bullish, but it's worth considering whether the upcoming resistance levels of $100,000 (psychologically important integer level) or $102,000 (161.8% Fibonacci extension of the 2021-2022 correction) will trigger a round of profit-taking, especially given the potential bearish divergence shown by the RSI, though we'd need a price reversal to confirm the signal, Weller said.

Regardless, while Bitcoin faces positive factors such as halving and policy tailwinds, the market's cycles of ups and downs have narrowed compared to the past, implying that both gains and losses could be faster and deeper. Furthermore, significant breakouts from prolonged consolidation phases often exceed expectations, so traders may need to be cautious about any counter-trend trades.