Correlated Markets and the Gold vs Bitcoin Debate

When investing it’s important to understand how your markets work. You don’t need to be an expert and indeed I’d go as far as to say that there are NO experts when it comes to markets. If you ever hear anyone claiming to be an expert in market analysis then you should run....run far away. But that doesn’t mean you can’t get a basic understanding of how the market for your investments work. You should have an idea about news items or developments that should be good for your market, or bad.

One of the things to keep an eye out for is correlations between markets you are interested in. Diversification is an important strategy for investing, but diversification is useless if all the markets that you are invested in are correlated, because they will all go up...or down, together so you may have all your eggs in one basket so to speak – and not even know it.

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Today when checking out some of my favourite markets I noticed some very clear correlation signals that I thought were worth pointing out. In the US there was some inflation data released and many markets around the world made a sharp move, followed by a sharp reversal. The news itself is not the point here, it’s the very distinctive pattern that the charts are all showing that is interesting to note.

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First up is the US 500 Cash Index, which basically tracks the top 500 of the largest publicly traded companies in the US. It’s a bit of a benchmark for traditional asset markets in what I call the legacy financial system or “mainstream” markets if you prefer. On this chart over the last 24 hours you can clearly see the sharp move downward followed by the big reversal where all the losses are recouped – plus some. It’s a very distinctive pattern that we can see and compare to other potentially correlated markets.

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Next up is Bitcoin, though in all honesty I could pluck just about any of the big cryptos out and the chart would not be too different. Here we can see that Bitcoin has made an almost identical pattern. Selling off from $19,200 to about $18,300 and then rebounding back above the starting point. This suggests that Bitcoin (and the crypto market generally) is currently HIGHLY correlated to the traditional asset markets. For those who have always touted Bitcoin as being a great hedge against the legacy financial system failing...this is NOT good.

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Next we have a look at Gold. Pattern looks similar here although the rebound isn’t as strong. This is possibly telling us something but I won’t speculate on that here. I want to show you the Gold price in Australian Dollars (which is where I am from)

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Now this is one is more interesting. Here you can see a very similar pattern, but upside down – or INVERSELY correlated to the US 500 and Crypto markets. This very clearly suggests that this sharp move is not really about the asset markets at all, but the underlying currency of the US Dollar that they are priced in.

So perhaps the conclusion to draw is that if you want to truly diversify from the mainstream and crypto markets then a good place to do so is in the Australian Gold market. It makes sense if the US economy is experiencing serious wobbles then the real flight to safety for those seeking diversification could be offshore in a friendly and stable 1st world country with a very strong gold industry.

DISCLAIMER : This is not financial advice.