Gold investment: Institutional investors ditching cryptocurrencies to buy yellow metal

In the aftermath of the crypto market sell-off, gold has seen significant price recovery. International gold prices hit the $1,900 highs on May 25 for the first time in 20 weeks. Domestic prices too have surged to a 4-month high.

So, is there a link between the falling cryptocurrencies and rising gold prices?

Institutional Investors selling cryptocurrencies

JP Morgan Chase analysts were quoted in media reports saying, “Large institutional investors are dumping bitcoin in favour of gold”.

The note from JP Morgan to its clients pointed out how there was a  marked contrast from the bullish crypto market of last month, when Bitcoin’s price was above $64,000.

This fall of cryptocurrencies has been a swift one. Not just Bitcoin, cryptocurrencies such as Ethereum, Ripple and Dogecoin have had a free fall, losing around 30% of gains in just one week.

Commodity and currency analysts too have been talking about how the steep correction in cryptocurrencies has led to an asset rotation to gold.

Gold’s lustre

JPMorgan research analysts in the company’s latest note have said, “Institutional investors are switching out of bitcoin and are instead returning to gold, for the first time in six months”

The research note also mentioned how momentum traders including crypto funds which have unwound assets recently are also responsible for this.

“What is striking is that the recent outflows from bitcoin funds have been accompanied by inflows into gold ETFs in a reversal of the last quarter of 2020 and the beginning of this year,” the research note said, adding that a similar pattern can be observed with futures contracts on the two assets.

The reasons behind the shift are however unclear, although JPMorgan has said that Bitcoin’s volatility, and the sharp downturns are at odds with gold’s greater price stability.

Cryptocurrency Vs Gold

Experts have pointed out how there is uncertainty around the regulation and taxation of cryptocurrencies in India. The Reserve Bank of India has asked lenders to reconsider their ties with traders and cryptocurrency exchanges. Several commercial banks in India also have taken a negative stance towards the cryptocurrency market and have stopped transactions with cryptocurrency exchanges. Experts say that the way it is just supply and demand and not any particular fundamentals which move the cryptocurrencies it better to wait before plunging in this space.

On the other hand, Gold is considered to be the safe haven for ages especially during uncertain times. It is also seen as a hedge against inflation. More so, its value is determined by certain economic and fundamental, measurable factors which make the prediction of gold prices more reliable. The volatility too has also been lower than other asset classes owing to a large number of participants.

Rahul Gupta, Head Of Research- Currency, Emkay Global Financial Services says, “The yellow metal has continued to show strength  and the safe-haven demand will remain intact in general. MCX Gold has hit the higher end of the range around 49,000, further upside is possible if prices hold on to these levels for few sessions.”

Anuj Gupta, Vice President, Commodity and Currency Research at IIFL Securities said: “US bond yields and the dollar have helped the yellow metal reach a pivotal point. We expect gold to reprise last year’s all-time peaks”