Gold, Bitcoin Drop In Tandem: 3 Key Reasons Powell’s Speech Didn’t Cause A Rally

The price of gold and Bitcoin dropped simultaneously after Federal Reserve chair Jerome Powell’s speech. The reaction from both assets was rather surprising because they are considered hedges against inflation.

Three key reasons could have led to the sell-off in the Bitcoin market following the speech. The potential catalysts are a sell-the-news pullback, traders expecting a small inflation overshoot and the ongoing consolidation phase.

Traders Already Expected The Fed’s Decision To Raise Inflation

Throughout the past week, industry executives and top strategists expected the Fed to raise the inflation rate.

Recommended For You’s senior analyst Jim Wyckoff said traders already anticipated the speech to be about inflation. But, instead of raising the rate, the Fed introduced the concept of average inflation. That means the inflation rate would average out to 2% over time, and it might temporarily increase over certain periods.

The reaction of the Bitcoin and gold markets suggests investors might have expected radical changes to the Fed’s monetary policy. Hence, when Powell introduced a relatively small change to the policy through average inflation, the market sold off. 

“To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time,” Powell said.

Before the speech, some strategists also said that the market might not believe the Fed pushes the inflation rate higher.

“Central bank credibility is crucial. Currently, they don’t have any credibility that they can or are willing to allow inflation to be higher than 2%, and that’s a problem,” Brown Advisory’s head of fixed income Tom Graff said.

So far, the reactions from investors suggest that the markets remain skeptical toward the newfound policy of the Fed.

Bitcoin And Gold Were Already Consolidating

Prior to the speech, Bitcoin and gold were consolidating after seeing explosive rallies throughout July and August.

Bitcoin rose to as high as $12,486 on Coinbase on August 17, achieving a new yearly high. 

The weakening momentum of Bitcoin and gold might have coincided with a lackluster speech from Powell, causing the downturn to intensify.

But, Adam Koos, president of Libertas Wealth Management Group, said he expects gold to rally to a new record high by the year’s end.

“While I’m out of the yellow metal for now, I’m watching it daily, and would like to see another 2 weeks of sideways movement, after which I expect it to head to new, all-time-highs by the end of the year,” Koos said.

Based on previous halving cycles of Bitcoin, the chances of BTC seeing a new all-time high in 2021 also remain high.

In past bull cycles, Bitcoin saw extended periods of consolidation following major rallies. That helps to  strengthen the foundation of the dominant cryptocurrency for future rallies. Both gold and Bitcoin analysts remain generally optimistic toward the healthy pullback the two assets are currently seeing.

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