Bitcoin, Gold May Be Sensing Monetary Debasement as Records Beckon

With both assets leading the market, here's a closer look at the factors driving their remarkable performance.

Bitcoin (BTC) and gold have both experienced remarkable performances in 2023, with bitcoin emerging as the top-performing asset for the first time since its inception in 2009. Both assets are outpacing major stock indices and other commodities, driven by factors such as monetary debasement and Federal Reserve liquidity trends.

In the past five days, bitcoin has surged 7%, breaking through the $64,000 price level for the first time since Aug. 26. Gold, for its part, has reached all-time highs on over 30 occasions this year, topping the $2,600 an ounce mark. These performances are noteworthy as they mark the first time both assets are the top performers of the year, according to Charlie Bilello, the chief market strategist at Creative Planning, an investment management and financial planning firm.

“Bitcoin and gold are the top performing assets of 2023, something that hasn’t happened a single year since bitcoin was created in 2009,” wrote Bilello in a recent Substack post.

Chart showing the performance of major stock indices, bitcoin and gold in 2023. (Substack)

Stock markets began the year in a downturn as the Federal Reserve raised interest rates to combat high inflation. However, major indices such as the S&P 500 and Nasdaq Composite have rallied in 2023, largely driven by easing inflation and anticipation of a "soft landing" for the U.S. economy.

Bitcoin and gold, on the other hand, have outperformed major stock indices and other commodities such as oil and copper. Year-to-date, bitcoin has risen 27%, outpacing its 2020 performance of 25%. The last time it performed better was in 2007. Gold is also up 27% in 2023.

Monetary Debasement and Gold

Gold has historically been seen as a hedge against monetary debasement and global uncertainty, and current economic conditions suggest it is again fulfilling this role.

The recent surge in gold prices can be attributed to several factors. Notably, gold began its rally before the significant monetary debasement triggered by the Covid pandemic in 2020, while bitcoin emerged as a star performer in late 2020 and into 2021. With bitcoin now just 14% away from its all-time high, is it playing catch-up once again?

A closer examination reveals that bitcoin's price tends to move in line with the Federal Reserve's net liquidity metric. This measure, calculated by subtracting reverse repo and the Treasury General Account from the Fed's balance sheet, indicates that bitcoin tends to follow liquidity trends.

Both bitcoin and net liquidity bottomed out toward the end of 2022, coinciding with the FTX collapse. Since then, bitcoin has steadily risen alongside an increase in net liquidity, which now exceeds $6 trillion.

The Federal Reserve's balance sheet currently stands at $7.1 trillion, and although it is still engaging in quantitative tightening, the pace has slowed. The collapse of Silicon Valley Bank (SVB) in March 2023 led to a $1.6 trillion reduction in the balance sheet, bringing it back to levels seen during the initial phases of quantitative easing in response to the pandemic.

The draining of reverse repo balances, now just over $300 billion, releases liquidity back into the financial system. This is stimulative, increasing the availability of funds for lending, investment, and overall economic activity.

Looking more broadly, the combined balance sheets of the world's 15 largest central banks – including the U.S., European Union, Japan and China – approach $31 trillion. While this number alone is not the focus, the trend shows a global resurgence in central bank balance sheets from about $30 trillion in July. This increase in liquidity is particularly

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