The inverse relationship of precious metals and Bitcoin

In my previous article discussing the rise of Bitcoin as a possible form of digital bullion, I compared and contrasted its measure of value in comparison to gold and silver bullion. When I wrote my first article, the value of Bitcoin was rising toward an impressive $20,000 in value, and — as experts had predicted — it fell in value once more to a low of around $6,000 earlier this month. It has just now returned to a value of near $11,000 for the first time this year. While Bitcoin appears to rise and fall in a cyclical nature, when it actually decides to rapidly increase or decrease in value is still risky to assess as an investor. As experts have previously suggested, a currency that fluctuates in value as much as Bitcoin tends to be a sign of its weakness rather than its strength — so how do gold and silver measure up?

According to APMEX, which has tracked the price of gold per ounce since February 16, 1987, the precious metal is currently sitting at $1,348.90 per ounce. The highest price gold reached during this period of 31 years was $1,864.12 on September 5, 2011. It was speculated that this may have been due to a growing accumulation of debt by European countries like Greece and Ireland that year. And, of course, many of the world’s economies were still recovering from the Great Recession of 2008. While there have been some fluctuations here and there, the price of gold has held a noticeable upward trend in growth since 2015. Being a relatively new and speculative form of currency, Bitcoin appears to double and half itself in value during the same month at times.

Silver, on the other hand, appears to have the same growth trend as gold until around January 21, 2013, when its value sharply cut in half over the subsequent months (from $31.95 in January to $19.97 in August of the same year). Silver currently sits at a value of $16.74 per ounce. Silver’s sudden drop in value in 2013 can partially be explained by advancements in technology, particularly with photography and electronics — the former for switching largely to digital media and the latter for decreases in the size of appliances that use silver. However, what’s interesting to note is that gold faced a similar drop in 2013 as well (though not as severe and noticeable as the one for silver), having gone from $1,684.88 in January to $1,300.40 in August. This suggests that there is at least one common factor that caused both precious metals to suddenly decrease in value that year.

It appears that since January 2013, while gold and silver are still more valuable than they were before 2011, they have not yet returned to their peak value between the years of 2011 and 2013. Why is this? What happened during those years to cause this spike and subsequent fall in the value of gold and silver? The answer is rather complicated, and while not all factors are known, what most investors understand is that when political and economic turmoil are high, precious metal prices tend to rise in value with the chaos. In short, the value of gold and silver holds an inverse relationship with the health of the economy.

According to the Bureau of Labor Statistics, between 2008 and 2012, the Producer Price Index (PPI) for gold experienced a 101.1 percent surge in value. We all know what happened in 2008 to create economic turmoil. On the other hand, the Bureau notes that during times of economic prosperity:

Investors are more likely to turn to more speculative investments, such as stocks, bonds, and real estate. During these times, the price for gold often declines.

Enter Bitcoin in 2009, a more “speculative” investment than precious metals. Since the Bureau and a variety of other sources have determined that increasing values of precious metals indicate economic turmoil, then the increase in the value of speculative investments like Bitcoin seems to indicate a healthy economy. While this relationship may not be perfect, it appears that precious metals and Bitcoin share a sort of connection that allows investors to crudely assess the relative health of the economy and when it is best to invest in either tangible assets or speculative ones. Utilizing this knowledge, we can determine that 2013 was the economic turning point for the great recession in the United States, given the sudden drop in the value of both gold and silver. Not surprisingly, the notorious cryptocurrency experienced its first surge in value in 2013 as well.


While Bitcoin fluctuates more rapidly and less predictably than gold and silver, it may be that it is now becoming one of the many speculative investments like stocks and bonds that we can indirectly use to assess the health of the economy. Today’s investors might conclude that silver and gold should be bought during economically prosperous times, and sold during economically hectic times — and that the best time for speculative investments like Bitcoin is the opposite. Could this crucial distinction save your wallet? Only time will tell.

❑

Follow us on Facebook and Twitter!