Bitcoin and gold both gave back gains this week after Federal Reserve Chair Warsh delivered a hawkish message at Jackson Hole, putting the so-called debasement trade on hold. The two assets had climbed in step through August as investors piled into hedges against currency devaluation, but Warsh's insistence that inflation remains above target and that the Fed's focus is on prices sent both lower.
Warsh's inflation-first message
Warsh said inflation is running above the 2% target and that the Fed's predominant focus should be on prices. The market is now pricing a 62.6% chance of a rate move to a 3.75%-4.00% target range at the September 16 meeting, up from 57% a day earlier and 39.9% a week ago, according to CME FedWatch. Higher policy rates raise the opportunity cost of holding assets that generate no yield, like gold and Bitcoin.
Gold and Bitcoin give back gains
Gold hit an intra-day high of $4,697 an ounce on Tuesday. It traded around $4,432 on Monday, down 5.6% from that peak. Bitcoin touched $81,354 on Binance last week, its highest level in about three months. It was near $77,411, down almost 5% from its high. Some of the retreat may also be ordinary profit-taking after a steep run. The MSCI global gold miners index gained 43% in August, its strongest month on record, and gold and Bitcoin ETFs together drew $7 billion across five trading days, also a record. The US Treasury also doubled its buyback cap for longer-dated debt to at least $4 billion, adding to the fiscal backdrop.
Bitcoin's new trading partner
Grayscale research found Bitcoin's 90-day correlation with gold climbed above 50% this year, while its correlation with the Nasdaq 100 fell from over 60% to roughly 33%. Zach Pandl, Grayscale's head of research, argues investors are treating Bitcoin as a monetary hedge rather than a leveraged bet on technology stocks. That shift helps explain why the two assets moved in lockstep through August.
The September 16 test
The September 16 meeting is now the test for the debasement trade. If the Fed delivers the expected move, the opportunity cost of holding non-yielding assets rises further. If it doesn't, the trade could resume. Either way, the market is watching the same number: 62.6%.
