Gold experienced a big dump of over 10%, falling below $4000! Bitcoin diverges in attracting funds, while the dollar undergoes a mass exodus.

The halo of gold is rapidly fading, while its “digital” competitor Bitcoin is bouncing back. Just a week after gold prices hit a historic high of $4,381 per ounce, they have fallen over 10%, dropping to a low of $3,915 per ounce on Thursday. The pullback in gold prices coincides with a nearly 6.70% rise in Bitcoin prices, highlighting a significant divergence between the two as the U.S. and China move closer to reaching a trade agreement.

Gold falls 10.6%: The reasons behind the capital exodus

(Source: Trading View)

After reaching a historical high of $4,381 per ounce, the gold price has fallen by more than 10.60% within just a week, dropping to a low of $3,915 per ounce on Thursday, marking the largest seven-day decline since April. The reasons for this sharp correction are multifaceted. Firstly, the meeting between Trump and Xi resulted in significant consensus, with Donald Trump making remarks about the 'stunning meeting' with Xi Jinping on Thursday, where the two leaders agreed to reduce the fentanyl tariff from 20% to 10%, effective immediately, and the tariffs on China will be reduced from 57% to 47%.

As risk appetite improves and the cryptocurrency market heats up, gold prices have pulled back below the $4,000 support level. The expectation of a trade agreement has eased geopolitical uncertainty, and the demand for gold as a safe-haven asset tends to decline when uncertainty decreases. Investors are moving away from safe assets and turning to risk assets in search of higher returns.

Secondly, changes in the US dollar index also affect gold prices. Although the US dollar index has fallen below 99.00, gold prices have not risen due to the weakening dollar; instead, they continue to decline. This divergence indicates that the adjustment in gold is primarily driven by a change in risk appetite, rather than dollar factors.

Third, there is enormous pressure for technical profit-taking. Gold has risen about 50% so far this year, and many investors have chosen to lock in profits after prices reached historical highs. This concentrated profit-taking behavior amplified the downside momentum. On Monday, the largest single-day redemption in over six months occurred, during which investors redeemed 448,000 ounces of gold, worth about $1.8 billion.

Bitcoin ETF attracts 839 million: Institutional confidence shifts

(Source: Farside Investors)

Data from Farside Investors shows that since gold prices hit a historic high on October 20, Bitcoin ETFs listed in the United States have absorbed a net inflow of $839 million, with holdings increasing continuously over the past four trading days. This sustained net inflow indicates that institutional investors' confidence in Bitcoin is strengthening.

In contrast, Bloomberg data shows that since October 22, a total of approximately 1.064 million ounces (nearly 4.1 billion USD) has flowed out of gold-backed ETFs. This includes the largest single-day redemption in more than six months that occurred on Monday, when investors redeemed 448,000 ounces of gold.

The reversal of this capital flow is highly symbolic. For thousands of years, gold has been the ultimate safe-haven asset and a store of wealth. However, the comparison of $839 million flowing into Bitcoin ETFs with $4.1 billion flowing out of gold ETFs shows that investors are increasingly favoring Bitcoin over gold. The reasons for this shift in preference include: the greater growth potential of Bitcoin, gold being a mature asset with limited upside; the portability and divisibility of Bitcoin being superior to physical gold; and the younger generation of investors having a natural preference for digital assets.

J.P. Morgan analysts expect the price of Bitcoin to reach $165,000 by 2025, believing that Bitcoin is still undervalued relative to gold. This institutional bullish perspective is driving funds from gold into Bitcoin. Current BTC technical indicators show that its bottom is strong, nearing $101,790, which aligns with the 20-week exponential moving average (20-week EMA) and the 1.0 Fibonacci retracement level. If Bitcoin's price can hold this support confluence point, the likelihood of it reaching $150,000 by the end of the year will increase.

Will gold bounce back? Historical patterns show an 8.3% recovery

(Source: Trading View)

Despite the current pullback in gold prices, multiple analysts believe that the fundamentals of its bull market remain intact. Supported by record central bank gold purchases, ongoing fiscal imbalances, and continued “currency devaluation trades” (where investors seek to hedge against the ever-expanding government debt and the risks of weak fiat currencies), gold prices have still risen by about 50% year-to-date.

Metal trader David Bechtman believes that despite the current pullback in gold prices, the fundamentals of its bull market remain intact. Technical indicators further suggest that gold is still in a bullish adjustment phase, with prices remaining above the 50-day exponential moving average (50-day EMA, indicated by the red wavy line). Over the past two years, each time gold has bounced back from the 50-day moving average support level, the rebound has ranged from 4% to 33%.

In addition, over the past thirty years, every time the price of gold falls by 10%, it tends to bounce back significantly within a few days, indicating that the price may have hit the bottom and is not likely to fall further. According to data emphasized by Sabu Trades, the previous ten instances of such crashes all resulted in positive returns within two months, with an average recovery of 8.3%.

If this trend continues, gold prices could return to the range of $4,200 to $4,250 by December, effectively retesting its historical highs and once again confirming the overall upward trend of the metal. As long as the gold price remains above the 50-day EMA, it could further reach the target price of $5,000 set by HSBC in 2026.

The Long-term Competitive Relationship Between Bitcoin and Gold

(Source: Trading View)

The correlation between Bitcoin and gold is increasing, with both being seen as stores of value and tools for hedging against inflation. However, in the short term, the two often show a negative correlation: when geopolitical tensions or economic uncertainty rise, funds flow into gold; when risk appetite improves, funds flow into Bitcoin.

The current divergence is a typical manifestation of this pattern. The consensus reached at the Xi-Trump meeting has reduced the risks of the trade war, the Federal Reserve's interest rate cut has provided liquidity support, and Germany's proposal to classify Bitcoin as a national asset has enhanced its political legitimacy. These factors together drive funds from the safe-haven gold into the more growth-oriented Bitcoin.

In the long term, Bitcoin and gold may coexist in investment portfolios, playing different roles. Gold provides stability and thousands of years of historical validation, while Bitcoin offers growth potential and technological innovation. JPMorgan believes Bitcoin is still undervalued relative to gold, suggesting that Bitcoin has significant room for appreciation. As the price of gold falls below $4000, Bitcoin is proving its narrative as “digital gold.”