Author: Lyv
Introduction
Gold has been unrivaled this year. Amidst multiple headwinds, including trade frictions, US Treasury bond fluctuations, and geopolitical tensions, gold has outperformed Bitcoin, the Nasdaq, and all major asset classes, rekindling calls for its "return of the king." Its year-to-date gains have exceeded 50%. In contrast, Bitcoin, known as "on-chain gold," which has gradually acquired safe-haven properties in recent years, has only risen by approximately 15%. This stark divergence in strength has sparked heated market debate over the question of "Why is gold strong while Bitcoin weak?" and the question of whether Bitcoin is still a worthwhile investment.
Through a careful analysis of gold's historical pricing patterns and buying logic, we maintain our view that Bitcoin, as an emerging safe-haven asset in the digital age, is currently experiencing a duality of "safe-haven and risk." In the long run, Bitcoin's uniqueness and rarity mean it holds significant long-term investment value, just like gold. The current low allocation to Bitcoin in global portfolios suggests greater leverage and potential returns. This article, in a Q&A format, systematically outlines our investment framework from the perspectives of the evolution of risk-averse logic, the hedging mechanisms between gold and Bitcoin, long-term allocation ratios, and tail risk pricing. We also incorporate the perspectives of major global institutions and investors to further demonstrate why Bitcoin deserves a higher strategic weighting in current and future global asset portfolios. Q1. In theory, both gold and Bitcoin possess safe-haven properties, but how do their roles differ? Answer: The market generally believes that gold is a mature safe-haven asset in the traditional "carbon-based world." Bitcoin, on the other hand, can be viewed as a rising star in the "silicon-based world" as a store of value, rather than a mature safe-haven instrument, and currently still possesses strong risk-asset attributes. We've observed that before the Bitcoin ETF was approved in early 2024, the correlation between Bitcoin's price and the Nasdaq index was as high as 0.9. After the ETF's approval, the correlation between Bitcoin's price and the Nasdaq index dropped to 0.6, and Bitcoin's price began to clearly track global M2 liquidity, demonstrating similar "inflation-resistant" properties to gold. Goldman Sachs analysis points out that while Bitcoin offers higher returns than gold, it also exhibits significant volatility. During periods of strong risk appetite, Bitcoin often behaves similarly to stocks. However, during stock market declines, Bitcoin's hedging effectiveness is less effective than gold. Therefore, gold is currently a more reliable safe-haven asset, while Bitcoin is still in the transition phase from a risk-on asset to a safe-haven asset. Ray Dalio, founder of Bridgewater Associates, also emphasized that investors seeking to maintain neutrality and diversify risk in their asset allocation can consider gold or Bitcoin, but he personally prefers gold as a historically proven hedge. He noted that while Bitcoin has a limited supply and some potential for storing value, its safe-haven status is far inferior to that of gold, which has a long history of support. Q2. What have been the main drivers of gold prices since 2007? Why did central banks become the primary buyers of gold after the 2022 Russia-Ukraine war? Answer: Since the 2007 global financial crisis, US real interest rates have become a key driver of gold prices. Because gold itself does not generate interest (a "zero-coupon asset"), its price is inversely correlated with real interest rates. When real interest rates rise, the opportunity cost of holding gold increases, and gold prices tend to fall. Conversely, when real interest rates fall (or even turn negative), gold's relative attractiveness increases, and gold prices strengthen. We have observed a significant correlation over the past fifteen years. For example, after 2008, the Federal Reserve's interest rate cuts led to lower real yields, triggering a sharp rise in gold prices, while rising real interest rates since 2013 have put pressure on gold prices. During the Fed's period of negative interest rates in 2016, we saw significant inflows into North American ETFs. Following the outbreak of the Russo-Ukrainian war in 2022, global central banks significantly increased their gold holdings, becoming the new dominant factor driving gold prices. That year, central banks set a record for net gold purchases, and since then, annual purchases have exceeded 1,000 tons. Data from Metals Focus shows that since 2022, central bank gold purchases have far exceeded the average for previous years (the average for 2016–2021 was 457 tons). tonnes), and is expected to purchase approximately 900 tons in 2025. These official purchases will contribute 23% of global gold demand (over 40% of investment demand) in 2022–2025, double the proportion in the 2010s. Currently, global central banks hold nearly 38,000 tons of gold, representing over 17% of all gold above ground and 44% of all gold used for investment purposes outside of jewelry and technology, showing potential for further growth. The World Gold Council's latest survey shows that central banks continue to hold optimistic outlooks on gold. The vast majority of respondents (95%) believe that global central bank gold reserves will increase over the next 12 months; a record 43% believe that central bank gold reserves will increase over the next 12 months. Of respondents believe their countries' gold reserves will also increase over the same period, and no one expects their gold reserves to decline. The driving force behind central banks' gold buying spree stems from 1) geopolitical hedging and 2) diversification of reserve assets: Western sanctions triggered by the Russia-Ukraine conflict have frozen half of Russia's foreign reserves, prompting many emerging countries to consider replacing some of their dollar assets with gold. With the surge in US debt and a bleak credit outlook, the appeal of dollar-denominated assets like US Treasuries has declined, further increasing gold's appeal as a reserve asset and safe haven. The allocation needs of some large long-term investment institutions also stem from the increasing failure of the "stock-bond seesaw": starting in 2022, stocks and bonds have shown a more positive correlation, deviating from the familiar "6:4 stock-bond allocation" narrative of the past 20 years. Q3. What major tail risks does gold's safe-haven function primarily hedge?
Answer: From the above analysis, it is clear that gold's future safe-haven value will primarily be reflected in hedging two relatively independent extreme tail risks:
US debt or inflation crisis (i.e., US dollar credit/sovereign debt risk)
Major geopolitical and economic conflicts
First, in scenarios of uncontrolled debt or high inflation, fiat currencies could depreciate significantly or even trigger a credit crisis, highlighting the role of gold as a long-term store of value and inflation hedge. A World Gold Council survey of nearly 60 central banks revealed that the primary motivation for central banks to hold gold is its perceived value as a long-term store of value and inflation hedge, as well as an asset that performs well in times of crisis. Central bank officials also view gold as an effective portfolio diversifier, hedge against economic risks (such as stagflation, recession, or debt default) and geopolitical risks. For example, the rapid rise in US debt has raised concerns about the long-term value of the US dollar, and gold can serve as a "shield" in such extreme scenarios. Second, with regard to geopolitical conflicts, gold is seen as a safe haven in times of turmoil. Whenever war or international tensions occur, such as the 2018 US-China trade war, the 2022 Russia-Ukraine war, and the 2025 US tariff crisis, safe-haven funds tend to flow into gold, driving up its price. Historical economic backtesting also shows a strong correlation between gold prices and trade policy uncertainty over the past decade. This also explains why gold has recently outperformed Bitcoin: amid a new round of escalation in the Sino-US trade confrontation, central banks and long-term investment institutions, as the main investors, should favor gold, an asset they are more familiar with, given the growing uncertainty surrounding the long-term bull market in US Treasuries. Q4. In an ideal asset portfolio, how should the gold allocation reflect expectations of tail risk? Answer: Gold is often likened to a portfolio's "insurance"—it can drag down returns in normal times, but provide protection during crises. Therefore, when managers perceive a rising risk of extreme events in the future, they often increase their gold holdings as a safe haven. Gold can significantly mitigate potential portfolio losses during periods of financial stress and provide stable, diversified returns during severe market downturns ("left-tail" events). Because gold demand comes in part from central banks, the tech industry, and consumers, its price movements do not fully align with those of financial assets. Some asset allocation frameworks specifically use gold for tail risk hedging. For example, some insurance funds and pension funds position gold as a highly liquid asset that can be liquidated in times of emergency, thereby offsetting losses in other assets when tail risks arise. Simply put, the weight of gold in a portfolio can be viewed as a reflection of the fund manager's expectations of the probability of extreme tail risks occurring. If a fund manager believes that the next 5-10 years will bring significant losses, then the gold weighting will be used to mitigate the risk of extreme tail risks. Given the increasing probability of the two aforementioned tail events occurring this year, it makes sense to increase the weighting of gold in the portfolio. This allocation is like buying insurance for a portfolio, and the size of the allocation reflects the manager's subjective assessment of the probability of a catastrophic event. Now, let's conduct a simple and interesting thought experiment: If we assume that the probability of the two major risks mentioned above materializing over the next five years is 10% (for example, 5% + 5%), then our allocation to these two risky assets should also be increased to 10%. If, looking beyond the next 10 years, the probability of these two tail risks materializing rises to 15%-20%, our allocation would also seem to need to increase to 15-20%. Over time, we believe the probability of these two tail risks materializing will inevitably increase. Q5. What is the current weighting of gold and Bitcoin in global asset allocations? What suggestions do market participants have for increasing their weightings? Answer: According to Goldman Sachs' latest research report, gold currently accounts for approximately 10% of global portfolio allocations. 6%, while Bitcoin accounts for only about 0.6%. The latter is approximately one-tenth of the former (with a smaller total market capitalization), indicating that Bitcoin is still in its early stages of asset allocation (compared to gold, which is already a mainstream asset). Given the recent volatility in the global macroeconomic environment, many prominent institutions and investment gurus have called for increasing the allocation weight of gold (and, to a lesser extent, Bitcoin). Ray Dalio of Bridgewater Associates recently stated that from a strategic asset allocation perspective, the proportion of gold in a portfolio should be increased to around 10%-15%, significantly higher than the gold weighting generally recommended by traditional investment advisors (typically around 5%). Notably, Dalio previously recommended only a 1-2% allocation to Bitcoin/gold in 2022, but has now increased this ratio severalfold to 15% due to rising risks, reflecting his reassessment of the importance of safe-haven assets. Other prominent investors have echoed similar sentiments, including Jeffrey Gundlach, founder of DoubleLine Capital. Gundlach recently even suggested that allocating nearly a quarter (25%) of a portfolio to gold wouldn't be excessive. Some research and historical backtesting also support a higher gold allocation: a long-term simulation analysis by an asset management firm shows that a gold allocation of approximately 17% yields the highest risk-adjusted return. Regarding Bitcoin, as institutional attitudes shift, some suggest a moderate increase in allocations. For example, Grayscale Fund recommends considering Bitcoin as one of its "core assets," with a 5%-10% allocation. Overall, global gold allocations currently far exceed Bitcoin, but there is widespread consensus that increasing both in traditional portfolios is necessary to enhance resilience to extreme risks. Q6. Returning to our thought experiment: If we assume a 10% tail risk over the next five years and a 20% tail risk over the next ten years, how should we simultaneously increase our allocation to hedge assets like gold and Bitcoin? Answer: Under the assumption that the probability of tail risk cannot be ignored, investors should significantly increase their safe-haven asset allocation compared to normal circumstances. Experience shows that when extreme events are anticipated, pre-emptively investing in hedge assets such as gold and Bitcoin can help protect the portfolio from shocks. This approach is similar to "black swan" hedging strategies: using a small cost to hedge a low-probability, high-risk event. Based on probability mapping, to hedge 20% of tail risk, the portfolio needs to allocate an equal amount of safe-haven assets, meaning that the total allocation of gold and Bitcoin should reach 20%. Assuming we increase the weight of gold to 15% and Bitcoin to 5%, the proportion of gold in global holdings would increase from its current approximately 6% to 15%, a 2.5-fold increase; while increasing Bitcoin from approximately 0.6% to 5% would be an increase of over 8 times. This suggests that in an idealized safe-haven portfolio, Bitcoin's potential for increased allocation (relative to the current benchmark) is far greater than that of gold. As a mature asset, gold's global holdings and allocation ratio are already substantial; doubling them would require a significant amount of capital. Bitcoin, on the other hand, is starting from a low base; even if it were to increase several-fold, its share of global assets would remain small. This disparity in growth also means that Bitcoin's price is more sensitive to incremental allocations—even a small inflow of funds can significantly boost its price. In actual market operations, institutional investors have begun to reflect this concept. In recent years, some major investment banks have proactively incorporated crypto asset allocation caps to mitigate systemic risks. Morgan Stanley's Global Investment Committee included Bitcoin in its asset allocation model for the first time in its latest recommendations, recommending a maximum allocation of 4% to crypto assets in aggressive growth portfolios for high-risk clients (a 2% cap for balanced portfolios and no allocation for conservative portfolios for now). Some analysts also point out that if Bitcoin gradually achieves a reserve status similar to gold in the future, its market capitalization could approach that of gold. Of course, this requires many prerequisites, but judging by the potential for increased allocation ratios, Bitcoin offers greater leverage in global asset allocations compared to gold (2.5x vs. 8.0x). This is why, while emphasizing increasing gold holdings, many institutional investors are beginning to focus on allocating a certain amount of Bitcoin: the combination of the two can both hedge against traditional financial risks and capture excess returns from the rise of emerging safe-haven assets. Q7. Compared to gold, what are the main advantages or unique features of Bitcoin as an asset in a portfolio? Answer: We believe that, from a purely economic perspective, Bitcoin could be a more suitable safe-haven asset than gold in the long term, potentially demonstrating greater hedging capabilities against both of the aforementioned tail risks. First, supply rigidity. Bitcoin's issuance is permanently capped at 2100. Unlike fiat currencies, which can be issued indefinitely, or commodities that reveal new reserves and improve recycling efficiency, this "silicon-based digital scarcity" makes it a scarce asset, similar to gold, offering long-term, inflation-resistant store of value. More importantly, Bitcoin's annual inflation rate has fallen below 1% after the 2024 halving, far lower than gold's 2.3% annual increase in supply. Second, "buy and hold" holdings remain low. Our analysis shows that mainstream institutional investors currently hold a small proportion of Bitcoin, with "buy and hold" participants holding no more than 10%, and only 17% including all ETF holders (ETFs include a large number of hedge funds and retail investors, who cannot all be counted as "buy and hold"). In contrast, "buy and hold" gold holders accounted for 65% of gold investment by the end of 2024, with central banks accounting for 44% and ETFs holding only 4%. This means that as recognition grows, there's enormous potential for increased allocations. BlackRock CEO Larry Fink recently publicly called Bitcoin "the new gold" and supported its inclusion in long-term investment portfolios, such as pension funds. Third, on-chain transparency. All Bitcoin transactions are recorded on the public blockchain, accessible and verifiable to anyone. This unprecedented transparency fosters market trust, allowing investors to monitor the Bitcoin network's circulation and reserves in real time, eliminating the need for a "black box" asset. In contrast, central bank gold reserves and over-the-counter transactions often lack real-time transparency. Fourth, decentralization makes it censorship-resistant. The Bitcoin network is jointly maintained by countless nodes around the world, and no central authority can unilaterally control or invalidate transactions. This decentralization provides strong censorship resistance—it is difficult for any country or organization to freeze or confiscate Bitcoin accounts, nor can it dilute its value through additional issuance. In extreme cases, non-physical gold also carries counterparty risk; during wartime, gold faces embargoes, confiscations, and other risks. Bitcoin, on the other hand, requires only electricity, a network, and a private key to store value and transfer payments. In short, Bitcoin's fixed supply and technical architecture give it inherent anti-inflation, low correlation, and censorship resistance. This makes it poised to play a new role in long-term asset allocation as a store of value and risk hedge in the digital age, serving as a valuable complement to gold and other safe-haven assets.
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