Bitcoin and gold are smashing through key levels. Here's what's driving the moves

Published Mon, Dec 4 20233:00 PM ESTUpdated Mon, Dec 4 20234:07 PM EST

Jesse Pound @/in/jesse-pound @jesserpound

While the U.S. equity market pulls closer to new highs, investors are also bidding up the centuries-old asset of gold and the new digital coins that have been touted as the yellow metal's replacement. Both gold and bitcoin kicked off the week by hitting new milestones — spot gold hit a record high above $2,100 per ounce, and bitcoin briefly topped $42,000 to hit its highest level since April 2022. The recent gains have been more dramatic in bitcoin, which is now up more than 150% for the year. The digital currency appears to have broken through key technical levels and could continue to rally through the end of the year, according to Joel Kruger, market strategist at LMAX Group. "In October, we saw this big breakout above $32,000, and then it started to slow down. I think the latest push through [$40,000] now kind of opens the door for potential acceleration, with limited setbacks, into the next target area, which I believe you want to be looking at the $48,000 to $53,000 area," Kruger told CNBC. BTC.CM= YTD mountain Bitcoin hit a new 2023 high on Monday. One of the main drivers for the renewed excitement around bitcoin is the potential approval of new ETFs. The Securities and Exchange Commission has long opposed such funds, but the regulator recently lost a court case against Grayscale, which wants to convert its Bitcoin Trust ( GBTC ) into an ETF. The SEC met with Grayscale and asset management giant BlackRock last week about their bitcoin ETF applications, and many in the financial industry expect a fund to be approved in early 2024. The arrival of a bitcoin ETF could open up new avenues of demand for crypto and make it a more broadly popular asset, Bernstein digital assets analyst Gautam Chhugani said in a Monday note to clients. "A Bitcoin ETF allows easy access to Bitcoin via broker accounts, RIAs and wealth/private banking channels. Think of Bitcoin ETF as the largest pipe ever built between traditional financial markets and crypto financial markets," the note said. "We expect 10% of Bitcoin in supply to be managed by ETFs, equivalent to $300 [billion] of AUM by [the end of 2028]. As close to 10 asset managers get approved for Bitcoin ETFs, we expect a strong marketing blitzkrieg, that would elevate Bitcoin as a recognized household asset, just like people are aware of Gold," Chhugani continued. While the eventual approval of a bitcoin ETF could be a "sell the news event," that reversal would likely be short-lived, Chhugani said. "Yes, the market will take a pause, post approval of the ETFs, since it would take a while for the ETF flows to start building momentum. Our expectation is continued strength and rally into ETF approval in [January], pause post approval and then market takes cues based on ETF flows," Chhugani wrote. Tied to rates Another factor in bitcoin's favor is the recent tumble for Treasury yields . Bitcoin has traditionally traded like a high-growth tech stock, and those perform well when interest rates are low. However, bitcoin has shifted in 2023 to be less correlated to tech stocks, according to Kruger, the LMAX strategist. "When you look at correlations with traditional assets, there really has been a breakdown in a very refreshing way. Because if you are a portfolio manager and you're looking to take on exposure to bitcoin, it's very attractive that it's an uncorrelated asset. And that has proven to be the case in 2023," Kruger told CNBC. The downward move in Treasury yields could also be helping gold, but not for the same reason. Gold is typically seen as a more defensive asset, and the tumble in bond yields is likely due in part to an expectation by some traders that the U.S. economy will fall into a recession in 2024. Citigroup's 2024 commodities outlook from Maximilian Layton, published on Monday, said the increased demand for gold could be a sign that investors are looking to protect against an economic downturn — and that the metal still has upside from here. "We remain bullish GOLD (to $2,150/oz, +5%) and SILVER (to $30/oz, +20%) by mid-2024, as we forecast strong demand for gold and silver as a hedge against downside risks in developed market equities and property, and in part reflecting our US economists call for a US recession by mid-2024. Gold should also be supported by robust central bank buying activity," Layton said in the note. Gold struggled to keep its momentum on Monday, with prices falling about 2% on the day and losing the $2,100 level after setting a record high in Sunday evening trading. Oanda senior market analyst Craig Erlam said in a note to clients on Monday that the overnight move may have been a trading blip. XAU= 5D mountain Gold retreated from the record high reached on Sunday evening in New York. "Perhaps the combination of pending orders above the previous high and an illiquid moment in the markets contributed to the extremely volatile move, with the yellow metal now trading back around the previous record highs," the note said. Even with Monday's retreat, spot gold is still up about 11% for the year.