The Chaos Reign: The Dual Rise of Digital Gold and Physical Gold

Recently, the global capital markets have experienced significant volatility, with the appreciation of the yen triggering a reversal in carry trades, the panic index soaring, and even gold experiencing slight pullbacks due to liquidity shocks, while Bitcoin has sharply declined alongside risk assets. This seems to contradict the discussion of the "twin" attributes, but we still believe that as the new international monetary system accelerates its evolution, the twin relationship between Bitcoin and gold will become even closer.

Since 1970, the price of gold (against the US dollar) has experienced three major upward cycles. The 1970s was a truly glorious period for gold, with prices rising more than 17 times at their peak. This period coincided with the collapse of the Bretton Woods system, the decoupling of the dollar from gold, and the two oil crises along with geopolitical tensions, which fully demonstrated gold's value preservation and safe-haven attributes. After the 1980s, gold prices entered a consolidation phase, and in the 1990s they weakened, related to the global control of inflation and the recovery of economic growth.

The first decade of the 21st century was the second round of the upward cycle, with gold prices rising more than fivefold at their peak. During this period, the internet bubble burst, China's accession to the WTO triggered inflation expectations, and the outbreak of the subprime mortgage crisis and the European debt crisis led developed countries' central banks to initiate quantitative easing policies, causing real interest rates to continue to decline, which enhanced the attractiveness of gold. After 2010, as the dollar began to appreciate again and the Federal Reserve reduced QE and raised interest rates, gold entered a consolidation period once more.

We are currently in the third round of the upward cycle, which began in 2019, and so far the price of gold has nearly doubled. This round of increase can be divided into two phases: from the end of 2018 to early 2022, affected by the China-U.S. trade friction and the COVID-19 pandemic, countries adopted loose monetary policies, and real interest rates fell rapidly; from 2022 to now, despite the rapid interest rate hikes in the U.S. to combat high inflation, the price of gold has still risen by more than 30%.

Traditional economics holds 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 feedback on the transition period of the new international monetary system, essentially strengthening the "consensus" on gold's monetary attributes. This is evident not only in the private sector but also in the operations of central banks around the world. The net purchases of gold by global central banks surged from 255 tons in 2020 to 1037 tons in 2023, demonstrating countries' defensive diversification against the dollar credit system.

Bitcoin has many similarities with gold: controllable supply, decentralization, non-counterfeitability, easy divisibility, and convenience in trading. The SEC's approval of the first batch of Bitcoin ETFs marks Bitcoin's further move into the mainstream. In recent years, the positive correlation between Bitcoin and gold prices has significantly increased, suggesting that it is transitioning from a high-risk asset to a "commodity currency."

As the international monetary system enters a new stage, the trend of diversification of reserve currencies is becoming increasingly evident. Against the backdrop of rising global inflation and heightened geopolitical uncertainties, gold remains in the mid-cycle of its upward trend. It is noteworthy that the diversification of reserve currencies is not only occurring at the national level; the private sector is also actively participating in this process. The mainstreaming of Bitcoin is accelerating, and its potential as a reserve currency is on par with gold, together narrating the "twin stars" story of a new era.