Introduction to the Divergence Between Metals and Bitcoin
Gold and copper have experienced a significant rise, despite the Federal Reserve’s indication of continued patience with interest rate cuts. This divergence suggests that markets are pricing in liquidity conditions ahead of formal policy changes, rather than waiting for confirmation from central banks. The behavior of these metals is closely tied to changes in real yields, financing conditions, and future expectations, which has been observed in earlier phases of easing cycles.
Historically, Bitcoin has responded later to the same forces, with the strongest gains coming only after metals had already repositioned themselves for looser financial conditions. The current setup appears similar, with gold attracting defensive capital as real yields on cash and government bonds fall, while copper responds to rising expectations for credit availability and global activity. This shift suggests that markets are adjusting to an environment where restrictive policies are reaching their limits, regardless of how long official rhetoric remains cautious.
Metals Move Before Central Banks Act
Financial markets typically reassess conditions before policymakers see a turnaround, particularly when the cost of capital begins to shift at the margins. The behavior of gold over several cycles clearly illustrates this, with gold prices often beginning to rise months before the first rate cut, as investors react to the peak in real yields rather than the cut itself. In 2001, 2007, and again in 2019, gold prices rose while policy was still “officially” restrictive, reflecting expectations that holding cash would soon bring diminishing real returns.
Copper amplifies the signal even further as it responds to other incentives. Unlike gold, copper demand is tied to construction, production, and investment cycles, making it sensitive to credit availability and financing conditions. If copper prices rise in tandem with gold prices, it suggests more than defensive positioning, indicating that markets are anticipating looser financial conditions to support real economic activity.
Real Returns Shape the Cycle More Than Political Headlines
The common driver for gold, copper, and ultimately Bitcoin is the real yield on long-term Treasury bonds, specifically the yield on 10-year US Treasury inflation-protected bonds. Real returns represent the return investors receive after inflation and serve as the opportunity cost of holding assets that produce little or no return. As these yields peak and begin to fall, the relative attractiveness of scarce assets increases, even if interest rates remain high.
Data from the U.S. Treasury Department shows that gold prices have tracked closely to real yields over time, with rallies often only beginning when real yields rise rather than after interest rate cuts. A hawkish message almost never managed to reverse this relationship when the real Treasury yield began to decline. Copper is less directly linked, but still responds to the same backdrop, as falling real yields tend to be accompanied by easier financing conditions, a weaker dollar, and improved access to credit, all of which support industry demand expectations.
Capital Rotation Explains Bitcoin’s Delayed Response
The order in which assets respond during easing cycles reflects how different types of capital reallocation occur. At the beginning of the process, investors tend to prefer value-preserving assets with lower volatility, which supports demand for gold. As expectations grow for easier credit and improved growth, copper is beginning to reflect this shift through higher prices. Bitcoin typically absorbs capital later, when markets are more confident that easing will occur and liquidity conditions will support riskier, more reflexive assets.
This pattern repeats itself across cycles. In 2019, gold’s rise preceded Bitcoin’s breakout, with Bitcoin eventually outperforming as interest rate cuts became a reality. In 2020, the timeline was shortened, but the order remained similar, with Bitcoin’s strongest gains coming after policy and liquidity responses had already been initiated.
What Would Invalidate the Setup?
This framework depends on real yields continuing to fall. A sustained rise in real yields would undermine the rationale for gold’s rise and weaken the case for copper, while leaving Bitcoin without the liquidity tailwinds that have supported past cycles. An acceleration of quantitative tightening or a sharp appreciation of the dollar would also tighten financial conditions and put pressure on assets that depend on easing expectations.
A renewed rise in inflation, forcing central banks to significantly delay easing, would pose a similar risk by keeping real yields high and limiting the scope for liquidity expansion. Markets can predict policy changes, but they cannot sustain those expectations indefinitely if the underlying data turns against them.
Conclusion
For now, futures markets continue to price in eventual easing and real government bond yields remain below their cyclical highs. Metals respond to these signals. Bitcoin has not done this yet, but its historical behavior suggests that it tends to only move when the liquidity signal becomes more persistent. If real yields continue to fall, the trend that metals are following now has often resulted in Bitcoin following later, and with significantly greater force. Read more about the relationship between metals and Bitcoin at https://cryptoslate.com/bitcoin-is-lagging-while-metals-soar-but-this-rare-divergence-preceded-every-major-crypto-breakout-since-2019/
