Data: The correlation between gold and Bitcoin hit a 10-month high, and Bitcoin may usher in an important price breakthrough

The world faces a shortage of physical gold amid supply chain disruptions, investors’ flight to safety and dramatic actions by the Federal Reserve to prop up the financial system.

Gold futures are trading at their highest premium to the spot price of gold in decades, according to Bloomberg data. The development comes as desperate investors try to put their money into more liquid derivatives to protect themselves from turmoil in global stock and commodity markets.

Image source: The Block, CoinMetrics, FactSet

Reports also suggest that major gold refiners have been shut down to curb the spread of the coronavirus, with border control measures and suspension of air routes also adding to tensions.

In fact, the London Bullion Market Association and several major banks have asked U.S. derivatives exchange CME Group to change its delivery rules for the precious metal to ease trading disruptions, Reuters reported.

Underpinning these supply issues is strong bullish investor sentiment toward gold.

Although gold prices have retreated 7% from last Thursday’s high, they have risen rapidly this week as the Federal Reserve has adopted a series of stimulus plans aimed at supporting the U.S. economy. At press time, gold is trading at around $1,618 per ounce.

In a research note sent to clients on March 23, Goldman Sachs argued that the recovery in gold prices was somewhat to be expected. A similar trend was observed during the 2008 financial crisis, when gold prices first plunged 20% and then rebounded after the Federal Reserve announced a $600 billion quantitative easing program.

Now, the Fed appears to be updating its playbook. On Monday, the central bank announced major steps to provide "unlimited quantitative easing" to buy government bonds and mortgage-backed securities. The Fed made two emergency rate cuts on March 3 and March 15, and began buying commercial debt and establishing new lending facilities to keep credit markets stable.

Source: The Block, Federal Reserve

"We may well be at an inflection point where, as in November 2008, 'fear' driven buying will begin to dominate liquidity driven selling pressure. As a result, both the near and long term outlook for gold looks more constructive and we are increasingly confident in our 12 month gold price target of $1,800 an ounce," the Goldman Sachs memo said.

Interestingly, the retail market doesn’t seem to be recovering from the gold rush, at least not on popular trading app Robinhood. The 30-day rolling growth rate of gold exchange-traded fund (ETF) holders on Robinhood plummeted to below 10%, while the growth rate of S&P 500 gold ETF holders jumped to over 40%.

Source: The Block, Robinhood

Meanwhile, Bitcoin’s correlation with gold also hit a 10-month high last week. At press time, Bitcoin is trading around $6,695.

Source: The Block, FactSet, CoinMetrics