Bar, Coin Gold Demand Rises as New Bitcoin ETF Challenges Gold ETFs

The surprisingly hot inflation reading for October triggered a sharp uptick in the gold price, although it can't seem to smash through the latest resistance level at around $1,865. Now that investors have had time to digest the inflation report, gold appears to have lost some of its momentum, possibly due to profit-taking after a long period of lackluster pricing for the yellow metal.

However, gold continues to trade between $1,850 and $1,860 an ounce, a sign that investors are still holding onto the yellow metal as an inflation hedge. Bitcoin has also been proven to be an inflation hedge, and the recent launch of a bitcoin exchange-traded fund has put it even more in competition with gold as a safe-haven asset.

Gold bars and coins in demand

The gold demand data for November won't be out for a few more weeks, but some interesting trends appeared in the October data, and some of these trends could continue in November. Perhaps the most interesting trend was the increased demand for gold bars and coins. Investment demand for the yellow metal was mixed in October, but demand for bars and coins was particularly robust.

The World Gold Council reported that demand for gold ETFs was weaker in October despite the healthy demand for bars and coins. According to the organization, coin purchases were strong in many global markets despite the lower overall third-quarter demand.

For example, sales of American Eagle gold coins in the U.S. rose 99% month over month and 108% year over year to 149,500 ounces. Year to date, sales of the coin are now at 1.072 million ounces, already higher than any annual total since 2010, and the year isn't over yet. American Eagle coin sales are on track to be the highest in over 20 years.

Additionally, data from the Perth Mint showed sales reaching 59,750 ounces, a 39% month-over-month decline but a 56% year-over-year increase. Year to date, Perth Mint sales have reached 879,508 ounces, higher than any previous annual total since at least 2012.

Bitcoin as an inflation hedge

It has become increasingly apparent that bitcoin is taking some of the safe-haven demand from gold amid the recent economic data. In an email on Thursday, Craig Erlam of OANDA said gold was adding to Wednesday's gains when it surged after the inflation report. He noted that "traders sought out an old friend in the face of inflation," adding that they "also briefly sought out a new companion as it appeared the bitcoin hedge narrative was finally sticking."

"It may feel like there's plenty of momentum in bitcoin but it's having real problems fully capitalizing on it as it continues to dip in and out of record territory," Erlam said. 

He pointed out that bitcoin traders seized the U.S. inflation data earlier this week and drove prices back to new highs, but it didn't last long, which isn't ideal for an inflation hedge.

"Bitcoin is certainly showing signs of exhaustion, but it wouldn't be the first time it's done that before managing to dig deep and surge once again," Erlam noted. "And you wouldn't put it past it now." 

However, he also said in an email on Friday that this week's trading action suggests gold is still the favored inflation hedge over bitcoin.

"The spike in bitcoin alongside a similar rally in gold after the [inflation] release [on Wednesday] gave the impression that both were benefiting from inflation hedge flows, but the cryptocurrency quickly gave back those gains and has struggled to recover since," Erlam wrote. " Whether that's a sign of the market not fully believing it as a hedge, a sign of an overbought market, or something else, it's not particularly bullish and may signal a correction. Of course, I've said this before at times when everything is pointing towards that, and it's dug deep, protected support levels, and rallied once more."

Bitcoin ETF faces off with gold ETFs

While gold ETFs saw outflows in October, according to the World Gold Council, it's worth considering whether the launch of the first bitcoin ETF in the U.S. could be taking a bite out of those flows, especially since some investors might see the cryptocurrency as an inflation hedge. The council noted in a recent post that ETFs are well-established financial products that facilitate access to a variety of investments, making them an excellent choice for investors.

However, there are some important differences between gold ETFs and the new bitcoin ETF that was just launched in the U.S. that investors should understand. The bitcoin ETF actually holds cash-settled futures, which makes it quite a bit different from gold ETFs, which are backed by the physical metal.

According to the World Gold Council, bitcoin futures usually trade in contango, which means that the futures price is higher than the spot price. As a result, the bitcoin futures ETF requires a roll cost to maintain it. 

Rolling over futures means the current expiry-dated position is closed and then entered into next month's contract. When that cost is added to the management fee, it amounts to approximately 10% per year, according to the council. That might not be a consideration for investors who believe bitcoin can return 100% per year, as it has done so far this year. All the fees will eat into the total returns of the bitcoin ETF in the long run.

Related: Gold Price Declines After Bouncing off $1,800 Resistance Level