Brought to you by @bitbear,

Bitcoin's 15-year journey has solidified its position as a significant asset in global market. Amidst this transformative trajectory, the link between Bitcoin’s performance and monetary policies remains a subject of ongoing discussion. As we seek to comprehend shifts in the monetary regime and its implications for the crypto industry, a retrospective analysis of gold's price dynamics emerges as a compelling avenue to explore.

At the core of both Bitcoin and gold lies the fundamental attribute of scarcity, positioning them as vital safeguards and hedges against the expansionary tendencies of modern fiat systems. But there might be more nuance to this. Gold has witnessed shifts in its price dynamics over time, as the changes in monetary regimes greatly impact the pricing of gold. In this essay, we aim to provide a framework of three vectors that can influence investor’s preference for different asset class, thereby influencing the assets’ performance.

In contemplating asset valuation, we often focus on the fiat value of assets. Yet, it is vital to remember that fiat currency itself is an asset and bears its own price. An oversupply of fiat can erode its relative value compared to other assets. Furthermore, the inherent interest embedded in fiat, as determined by central banks' interest rates, influences its appeal in relation to interest-bearing or non-interest-bearing assets. Consequently, this dynamic leads to the appreciation or depreciation of assets priced dominantly in the aforementioned fiat.

This brings to three pivotal dimensions that exert substantial influence over the value of assets denominated in fiat:

1. Global Liquidity (M2/GDP): The magnitude of global liquidity, depicted by the ratio of M2 money supply to GDP, significantly drives asset valuations. When liquidity is abundant, it tends to lift asset prices as investors seek to deploy their capital in various markets.

2. Price of Fiat (Real Interest Rate): The prevailing real interest rate associated with fiat currency greatly influences its relative attractiveness compared to other assets. Higher interest rates can make fiat more enticing, potentially leading to capital flows that affect other asset prices.

3. Comparative Values: Economic Conditions, Growth vs. Value, Tech vs. Traditional: Various economic conditions, such as boom or bust cycles, also have a profound impact on asset prices. As assets function as placeholders for impending value claims, their pace of value alteration varies across different stages of the economic cycle. For instance, tech stocks poised to thrive during periods of rapid economic expansion naturally garner heightened favor, signifying future high-growth potential.

Therefore, the paramount question for investors becomes determining where the chosen asset aligns within these three dimensions. Is the present context causing it to hold greater appeal for investors in comparison to other assets? Ultimately, assets possess not only intrinsic value but also participate in a “beauty contest” of sorts.

Gold serves as a good illustration. In traditional terms, industrial utilization constitutes merely 10% or less of the overall demand for gold. The bulk of gold's role is invested in being a store of value, as well as a component of jewelry. One could argue that gold assumes the position of a non-productive asset, wherein its valuation is substantially impacted by external factors and the appetites of investors.

At Smrti Lab, we find merit in economist Jintao Zhou's theory, which offers a robust framework for understanding the forces driving gold prices. We will outline Zhou's perspective and delve into its implications for Bitcoin.

Zhou is a proponent of the long-term economic cycle theory and consequently attributes these cycles as the primary driver of gold price movements. His rationale is as follows: since the collapse of the Bretton Woods system, gold has served as a hedge and is thus inversely correlated with the stability and prosperity of the global economy and the US dollar system.

Gold in Periods of Economic Prosperity

During periods of sustained recovery and prosperity, the real holding yield of gold tends to diminish. As the economy flourishes with robust fundamentals and strong real growth momentum, gold not only fails to generate excess returns but also falters in its role as a reliable store of value. In essence, the rate at which gold prices rise lags behind the price increases witnessed in other assets and commodities.

The underlying reason behind gold's struggle to maintain its value relative to other assets during growth phases lies in the concept of opportunity costs and interest losses. As a thriving economy presents ample investment opportunities aimed at enhancing corporate fundamentals, the allure of gold as an ideal investment asset diminishes. In simpler terms, during periods of economic recovery and prosperity, investor focus shifts towards pursuing avenues with higher growth potential, consequently relegating gold to a less favored position.

In comparison, holding BTC also has opportunity costs and interest losses, not only relative to real-world productive assets such as equities, but also to other interest bearing crypto assets. We expect to see a similar price action in BTC/ETH during the boom/bust cycle of crypto-economy. This helps explain the resilience and lags of BTC price compared to other crypto assets during different phases of the crypto market.

Gold in Periods of Economic Slowdown

After a prolonged period of price stability and economic prosperity, the tides begin to turn. Debt burdens rise, accompanied by risky behaviors and a sustained increase in the prices of goods and services. In such times of heated inflation, scarce commodities like gold become an attractive option for hedging purposes. Meanwhile, economic activity weakens, corporate profit expectations wane, and investor interest in stocks diminishes.

According to Zhou’s research, during the early stages of a long-wave recovery, prosperity, and the initial phases of contraction, gold prices tend to remain relatively stable when compared to other commodities such as metals or agricultural products. However, as the contraction progresses and reaches its trough, gold begins to exhibit a significant return compared to other assets that are more closely related to economic growth. This underscores a fundamental distinction between gold assets and other assets including commodities.

While economic growth tends to be a more qualitative factor over the long term, the relationship between real interest rates and gold is far more direct and quantitative.

When central banks possess the authority to adjust rates on fiat currency, they are modifying the value of that currency. In essence, they're adjusting the opportunity cost of holding assets other than fiat. Consequently, in an environment characterized by high real interest rates, the opportunity cost of holding non-interest-bearing assets, like gold, increases.

This perspective aligns with the observed negative correlation between gold prices and U.S. real interest rates, as documented statistically by multiple scholars.

Gold maintains a stable negative correlation with the TIPS(Treasury Inflation Protected Securities) Yield, which represents the U.S. real interest rate (and therefore, it's positively correlated with the TIPS Bond price). Peaks and troughs in gold price correspond to price actions of TIPS Bond.

We believe a scenario analogous to that of gold could manifest for Bitcoin. This can explain the recent relative stagnation in the crypto market, especially when set against the recent bull run in equities.

In the realm of equities, the situation isn't quite as black and white. While conventional wisdom suggests that rising interest rates would suppress stock valuations—given that future cash flows are discounted more heavily—the reality is multifaceted. In reality, higher interest rates often coincide with robust economic growth and stronger company earnings, and even higher multiples. So, even as the financial mechanics might push stock prices downward, the broader economic context and market force could very well act as a supportive force, countering the downward pressure.

The one factor gaining significant attention in recent discussions is the phenomenon often colloquially termed as "money printer go burr," indicative of the surging liquidity in the market.

Utilizing the data from the United States, Eurozone, Japan and China, the Marshallian K ratio (M2/GDP) can serve as a primary indicator of global excess liquidity trends.

Comparing gold prices to the M2/GDP ratio, it's clear that since 2000, there has been rapid growth in M2 relative to GDP, particularly after 2008 and after 2020. These periods can be pinpointed as significant drivers behind gold's price surge.

Since May 2022, we've witnessed the swiftest decline in US money supply since the 1930s. This decline is also a contributing factor to the stagnating prices observed in both gold and bitcoin. In an environment of abundant liquidity, asset prices often rise as investors actively seek avenues to deploy their capital. However, in contrast, when liquidity tightens, investors face decisions on where best to allocate their more limited resources.

The market value of an asset is anchored in its inherent claim to future capital flows, its scarcity (or the demand driven by such scarcity), and its reflexivity within the financial market. Gold's historical performance suggests that, ceteris paribus, investors gravitate towards gold over other assets when other assets are forecasted to underperform (such as stocks during a recession), when overflowing liquidity prompts a surge in gold prices, or when the real interest rate (representing the opportunity cost of holding gold) remains low.

The chart below illustrates the Investor Allocation Preference Spectrum in an environment characterized by high rates and a robust economy, akin to our current landscape.

However, as we project a potential decline in rates, this spectrum may undergo a noticeable shift. Declining rates accompanied by slower economic growth will bring gold, and increasingly, Bitcoin, back to the favored end of the spectrum.

If we see the global asset value and liquidity as whole, what can be allocated to one asset cannot be allocated to another one. Bitcoin, in many ways, mirrors gold by serving as a "risk-hedging" mechanism in the global economy. As we project into the future, Bitcoin, with its added layer of digital adoption and acceptance, could be doubly appealing. The digital nature of Bitcoin resonates more strongly with a global audience that's increasingly online. In essence, we think Bitcoin/gold price ratio will continue its upward trend as the world becomes more digital.

Brought to you by @bitbear,

Bitcoin's 15-year journey has solidified its position as a significant asset in global market. Amidst this transformative trajectory, the link between Bitcoin’s performance and monetary policies remains a subject of ongoing discussion. As we seek to comprehend shifts in the monetary regime and its implications for the crypto industry, a retrospective analysis of gold's price dynamics emerges as a compelling avenue to explore.

At the core of both Bitcoin and gold lies the fundamental attribute of scarcity, positioning them as vital safeguards and hedges against the expansionary tendencies of modern fiat systems. But there might be more nuance to this. Gold has witnessed shifts in its price dynamics over time, as the changes in monetary regimes greatly impact the pricing of gold. In this essay, we aim to provide a framework of three vectors that can influence investor’s preference for different asset class, thereby influencing the assets’ performance.

In contemplating asset valuation, we often focus on the fiat value of assets. Yet, it is vital to remember that fiat currency itself is an asset and bears its own price. An oversupply of fiat can erode its relative value compared to other assets. Furthermore, the inherent interest embedded in fiat, as determined by central banks' interest rates, influences its appeal in relation to interest-bearing or non-interest-bearing assets. Consequently, this dynamic leads to the appreciation or depreciation of assets priced dominantly in the aforementioned fiat.

This brings to three pivotal dimensions that exert substantial influence over the value of assets denominated in fiat:

1. Global Liquidity (M2/GDP): The magnitude of global liquidity, depicted by the ratio of M2 money supply to GDP, significantly drives asset valuations. When liquidity is abundant, it tends to lift asset prices as investors seek to deploy their capital in various markets.

2. Price of Fiat (Real Interest Rate): The prevailing real interest rate associated with fiat currency greatly influences its relative attractiveness compared to other assets. Higher interest rates can make fiat more enticing, potentially leading to capital flows that affect other asset prices.

3. Comparative Values: Economic Conditions, Growth vs. Value, Tech vs. Traditional: Various economic conditions, such as boom or bust cycles, also have a profound impact on asset prices. As assets function as placeholders for impending value claims, their pace of value alteration varies across different stages of the economic cycle. For instance, tech stocks poised to thrive during periods of rapid economic expansion naturally garner heightened favor, signifying future high-growth potential.

Therefore, the paramount question for investors becomes determining where the chosen asset aligns within these three dimensions. Is the present context causing it to hold greater appeal for investors in comparison to other assets? Ultimately, assets possess not only intrinsic value but also participate in a “beauty contest” of sorts.

Gold serves as a good illustration. In traditional terms, industrial utilization constitutes merely 10% or less of the overall demand for gold. The bulk of gold's role is invested in being a store of value, as well as a component of jewelry. One could argue that gold assumes the position of a non-productive asset, wherein its valuation is substantially impacted by external factors and the appetites of investors.

At Smrti Lab, we find merit in economist Jintao Zhou's theory, which offers a robust framework for understanding the forces driving gold prices. We will outline Zhou's perspective and delve into its implications for Bitcoin.

Zhou is a proponent of the long-term economic cycle theory and consequently attributes these cycles as the primary driver of gold price movements. His rationale is as follows: since the collapse of the Bretton Woods system, gold has served as a hedge and is thus inversely correlated with the stability and prosperity of the global economy and the US dollar system.

Gold in Periods of Economic Prosperity

During periods of sustained recovery and prosperity, the real holding yield of gold tends to diminish. As the economy flourishes with robust fundamentals and strong real growth momentum, gold not only fails to generate excess returns but also falters in its role as a reliable store of value. In essence, the rate at which gold prices rise lags behind the price increases witnessed in other assets and commodities.

The underlying reason behind gold's struggle to maintain its value relative to other assets during growth phases lies in the concept of opportunity costs and interest losses. As a thriving economy presents ample investment opportunities aimed at enhancing corporate fundamentals, the allure of gold as an ideal investment asset diminishes. In simpler terms, during periods of economic recovery and prosperity, investor focus shifts towards pursuing avenues with higher growth potential, consequently relegating gold to a less favored position.

In comparison, holding BTC also has opportunity costs and interest losses, not only relative to real-world productive assets such as equities, but also to other interest bearing crypto assets. We expect to see a similar price action in BTC/ETH during the boom/bust cycle of crypto-economy. This helps explain the resilience and lags of BTC price compared to other crypto assets during different phases of the crypto market.

Gold in Periods of Economic Slowdown

After a prolonged period of price stability and economic prosperity, the tides begin to turn. Debt burdens rise, accompanied by risky behaviors and a sustained increase in the prices of goods and services. In such times of heated inflation, scarce commodities like gold become an attractive option for hedging purposes. Meanwhile, economic activity weakens, corporate profit expectations wane, and investor interest in stocks diminishes.

According to Zhou’s research, during the early stages of a long-wave recovery, prosperity, and the initial phases of contraction, gold prices tend to remain relatively stable when compared to other commodities such as metals or agricultural products. However, as the contraction progresses and reaches its trough, gold begins to exhibit a significant return compared to other assets that are more closely related to economic growth. This underscores a fundamental distinction between gold assets and other assets including commodities.

While economic growth tends to be a more qualitative factor over the long term, the relationship between real interest rates and gold is far more direct and quantitative.

When central banks possess the authority to adjust rates on fiat currency, they are modifying the value of that currency. In essence, they're adjusting the opportunity cost of holding assets other than fiat. Consequently, in an environment characterized by high real interest rates, the opportunity cost of holding non-interest-bearing assets, like gold, increases.

This perspective aligns with the observed negative correlation between gold prices and U.S. real interest rates, as documented statistically by multiple scholars.

Gold maintains a stable negative correlation with the TIPS(Treasury Inflation Protected Securities) Yield, which represents the U.S. real interest rate (and therefore, it's positively correlated with the TIPS Bond price). Peaks and troughs in gold price correspond to price actions of TIPS Bond.

We believe a scenario analogous to that of gold could manifest for Bitcoin. This can explain the recent relative stagnation in the crypto market, especially when set against the recent bull run in equities.

In the realm of equities, the situation isn't quite as black and white. While conventional wisdom suggests that rising interest rates would suppress stock valuations—given that future cash flows are discounted more heavily—the reality is multifaceted. In reality, higher interest rates often coincide with robust economic growth and stronger company earnings, and even higher multiples. So, even as the financial mechanics might push stock prices downward, the broader economic context and market force could very well act as a supportive force, countering the downward pressure.

The one factor gaining significant attention in recent discussions is the phenomenon often colloquially termed as "money printer go burr," indicative of the surging liquidity in the market.

Utilizing the data from the United States, Eurozone, Japan and China, the Marshallian K ratio (M2/GDP) can serve as a primary indicator of global excess liquidity trends.

Comparing gold prices to the M2/GDP ratio, it's clear that since 2000, there has been rapid growth in M2 relative to GDP, particularly after 2008 and after 2020. These periods can be pinpointed as significant drivers behind gold's price surge.

Since May 2022, we've witnessed the swiftest decline in US money supply since the 1930s. This decline is also a contributing factor to the stagnating prices observed in both gold and bitcoin. In an environment of abundant liquidity, asset prices often rise as investors actively seek avenues to deploy their capital. However, in contrast, when liquidity tightens, investors face decisions on where best to allocate their more limited resources.

The market value of an asset is anchored in its inherent claim to future capital flows, its scarcity (or the demand driven by such scarcity), and its reflexivity within the financial market. Gold's historical performance suggests that, ceteris paribus, investors gravitate towards gold over other assets when other assets are forecasted to underperform (such as stocks during a recession), when overflowing liquidity prompts a surge in gold prices, or when the real interest rate (representing the opportunity cost of holding gold) remains low.

The chart below illustrates the Investor Allocation Preference Spectrum in an environment characterized by high rates and a robust economy, akin to our current landscape.

However, as we project a potential decline in rates, this spectrum may undergo a noticeable shift. Declining rates accompanied by slower economic growth will bring gold, and increasingly, Bitcoin, back to the favored end of the spectrum.

If we see the global asset value and liquidity as whole, what can be allocated to one asset cannot be allocated to another one. Bitcoin, in many ways, mirrors gold by serving as a "risk-hedging" mechanism in the global economy. As we project into the future, Bitcoin, with its added layer of digital adoption and acceptance, could be doubly appealing. The digital nature of Bitcoin resonates more strongly with a global audience that's increasingly online. In essence, we think Bitcoin/gold price ratio will continue its upward trend as the world becomes more digital.