Gold vs. Bitcoin: Fed Liquidity, Inflation, and the Next Safe-Haven Rally

Federal Reserve Chair Jerome Powell signaled that quantitative tightening (QT) is nearing its end. He suggested that the Fed may soon stop reducing its holdings of Treasuries and mortgage-backed securities. While he didn’t provide a specific date, he noted that reserve levels are approaching the Fed’s target.

Despite ongoing QT, the Fed has increased its holdings of long-term U.S. Treasuries by nearly $200 billion. This action mirrors the effects of quantitative easing, helping to keep interest rates artificially low. Additionally, the Fed injected liquidity into the system by repaying reverse repo loans and reducing the Treasury General Account (TGA), which pushed more cash into financial markets.

These actions have kept the Chicago Fed Financial Conditions Index near historically loose levels at -0.546, as shown in the chart below.

However, commercial bank reserves have now fallen below $3 trillion, suggesting that tightening may return unless new liquidity measures are introduced.

End of Bond Bull Market Sparks Demand for Hard Assets

While the Fed has temporarily suppressed long-term yields, structural forces indicate that the bond bull market has ended. Bond prices are now in a secular decline, with long-term yields trending higher on the long-term charts. This environment of rising rates, debt saturation, and fiscal stress weakens bonds as a safe-haven asset.

At the same time, inflation expectations are rising, as shown in the chart below. The Fed rate cuts, combined with persistent inflation, will likely push real interest rates lower and weaken the U.S. dollar further. This dollar weakness supports assets such as gold (XAU) and Bitcoin (BTC).

Bitcoin Rides Liquidity Wave but Remains Risk-Heavy

Bitcoin has surged as liquidity flooded the financial system. Similarly, gold prices have risen sharply amid a weakening U.S. dollar. The record surge in gold reflects investors’ growing demand for a hedge against fiat currency debasement and central bank overreach.

However, Bitcoin is still more volatile and speculative than gold. Its price is influenced by regulations, ETF developments, and adoption, not just economic trends. Although some large investors have entered the market, Bitcoin lacks gold’s long history as a safe haven during times of crisis. However, the price of Bitcoin rises faster than gold when market liquidity increases.

The Bitcoin-to-Gold ratio chart below shows a steady uptrend since 2012, indicating strong bullish momentum for Bitcoin. However, a key resistance has formed near the 40 level, where the ratio has been consolidating in a tight range. This consolidation began as gold prices surged and broke above the critical $3,500 mark.

Since then, the ratio has failed to break above 40 and has instead declined sharply. This drop in the ratio coincided with a correction in Bitcoin prices and a strong rally in gold, which pushed it above the $4,000 level.

A breakout above the 40 range in the ratio would likely trigger renewed buying in Bitcoin. In that scenario, Bitcoin could outperform gold in the next cyclical phase.

Geopolitical Risk Fuels Gold’s Parabolic Breakout

Rising geopolitical tensions and growing macroeconomic imbalances have triggered strong buying momentum in the gold market, pushing prices to $4,200. Investors are turning to gold as a hedge against inflation and as protection from policy missteps and global instability.

The breakout above $4,000 is significant. It has set off a parabolic feedback loop, drawing in more buyers. This surge in demand could drive gold prices to elevated levels, possibly reaching $6,000 in the coming months.

The weekly chart for the spot gold market shows a breakout above the ascending broadening wedge pattern, pushing prices into uncharted territory in the short term. Gold has been surging consistently, with momentum increasing week after week and no clear signs of a correction.

This price action suggests that the gold market is responding strongly to ongoing geopolitical events and rising market uncertainty, which may drive gold into a precarious and undefined price zone.

Navigating the Next Bull Phase in a Market Fueled by Intervention

The Fed may be slowing down its tightening, but it is still actively influencing the market. By keeping long-term interest rates low amid high inflation and rising government debt, the current conditions favour gold and Bitcoin.

Gold remains the top safe-haven during periods of inflation and global tensions. However, Bitcoin offers higher potential gains but comes with greater risk. Both assets benefit when the U.S. dollar weakens and real interest rates decline.

Gold has surged above $4,000 and still shows potential for further gains. However, a quick pullback may occur once the price peaks in the short term. This decline is likely to be brief and could present a buying opportunity for the next rally. Investors may consider adding positions in gold during such corrections. Meanwhile, Bitcoin is consolidating within a wide range above the key $100,000 level, preparing for its next move higher.