In this blog, we have discussed a study on the relationship between the ‘much-talked topic’ Bitcoin and Gold. In order to study the relationship, we have plotted a ratio chart i.e. Comex Gold future / CME Bitcoin future (in percentage terms).
To come up with our assumptions we have used mean revision theory. The mean revision suggests that price volatility or historical returns of an asset will eventually revert to the long-term average or mean value of that entire period. Also, in the lower pane of the charts, we have plotted RSI (Relative strength index) to study the momentum of the ratio.
In the above chart, we have divided gold by bitcoin and plotted a ratio chart. A rising chart denotes that gold will outperform bitcoin and vice versa. The ration line is moving lower (marked in red), which denotes that gold has underperformed bitcoin in recent months.
For the representation of the mean, we have plotted 200 days moving average (marked by the smooth green line). Historically, the ratio has a tendency to revert back to its mean (200 days moving average). Contrary, it has been observed that ratios deviation from mean on the upside is more than 100% marked as 1 and 3 and on the other hand deviation on the downside is more than -60% marked as 2 and 4.
Currently, the ratio has deviated on the downside from the mean (current value-76.40%), and thus denoting gold has underperformed bitcoin. This could be also be termed as money is flowing into bitcoin then into gold and people have found more value in bitcoin than in gold.
On the flip side, considering the mean-reverting nature of the ratio this could also be looked at as a ‘turning point’ and the ratio could start reverting back to the mean. For instance, the scenario marked as 2 deviated to the lower side but started reverting back to the 200 MA (marked by the green arrow) after RSI in the bottom pane denoted positive divergence.
RSI’s positive divergence is formed when prices are making consecutive lower lows but RSI failing to confirm it by making higher lows. An example of positive divergence is marked in the below RSI pane (denoted by the red lines).
Looking at the current RSI patterns, it has formed a positive divergence similar to a situation marked as 2. This could mean the ratio can force itself back to its 200 days moving average. In other words, funds flows could make their way from bitcoin to gold and this can also be termed as gold outperforming bitcoin in coming months.
Now let’s take a look at how gold prices could react if our assumptions stand their ground.
Prices are currently trading near the support zone of Rs.44900 and Rs.45200 (marked by the double red line). In the bottom pane, RSI is denoting a positive divergence similar to the ratio chart. This could lead to two scenarios, first prices could broadly trade in the range Rs.45800 and Rs.47600. Secondly, a break above Rs.47600 would confirm that the recent swing low of Rs.45861 will act as a turning point and the price could be heading towards Rs.49800 and Rs.51900 on the upside. Hence it would interesting to see how this situation turns out in the future.
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