Ethereum v gold: Is there a trap ahead?

It takes some stomach to watch Ethereum (ETH) go through its characteristic gyrations.

Drawdowns of 80% are apparently coded into its DNA. That’s about how much it dropped between November 2021 and June 2022, when it bottomed around $1 000. It then promptly bounced 60% to trade at $1 600 this week.

Gold, meanwhile, remains relatively steady at $1 800/oz, proving once again its resilience in times of tempest.

ETH is the second largest crypto by market cap, currently worth $194 billion, less than half the size of bitcoin’s (BTC) market value of $432 billion.

An interesting convergence between ETH and gold is playing out, as shown in the chart below. ETH and gold have crossed paths numerous times over the last two years.

Read: ‘Wen flippening?’ crypto fans wager on ether surpassing bitcoin

Those in search of safety should probably stick with gold, but there is a corps of ETH faithful who believe the time may not be far off when ETH surpasses BTC in value, an event known as the “flippening”. It would first have to break the “gold barrier” at $ 1800.

ETH v gold

Source: TradingView (Eth = Blue; Gold in USD = yellow)

The optimism surrounding ETH is driven by its move to a more energy-efficient form of mining known as proof-of-stake (PoS), which happens next month. This upgrade, known as the Merge, has been years in the making and will remove bottlenecks and allow it to scale more easily.

There’s a lot riding on this upgrade, given the number of related crypto projects perched on the Ethereum blockchain.

There are close to 200 decentralised finance or DeFi projects – think of them as types of crypto-backed banks – on the Ethereum blockchain. It also forms the backbone for most non-fungible tokens (NFTs), which is a growing marketplace for digital assets, as well as tokens such as Chainlink (LINK), Tether (USDT), Binance Coin (BNB) and the USD Coin (USDC).

The chart above shows some degree of correlation between ETH and gold, though ETH has a tendency towards parabolic moves, both to the upside and downside.

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Commodities analysts have been anticipating a move in gold for several weeks. Even CNBC’s Jim Cramer is warming to gold, even though it’s been flat for the best part of a year.

“Last year, we had rampant inflation, and gold didn’t do much for you. I thought the culprit was crypto. That people who normally hide their money in gold were instead buying cryptocurrencies,” said Cramer.

“This year, the whole crypto ecosystem has collapsed. Meaning that gold doesn’t have much competition,” he added.

“And we’ve gotten insanely high inflation readings, the worst in decades. Yet gold is basically flat for the year.”

Legendary technical analyst Larry Williams discovered that gold tended to track oil price moves with a delay of about eight weeks. That being the case, gold is due for a rally.

Another indicator in favour of a gold rally, according to Cramer, is the relatively small number of trading positions that are currently long gold.

Historically, this has been a time when gold has rallied. There are currently 92 690 long positions for gold, the lowest it’s been since May 2019. When gold was at its peak above $2 000/oz in March this year, there were 200 790 long contracts, the highest it has been in four years. That was followed by a drop in the gold price.

Both ETH and gold appear to be lining up for a move up.

The only question is whether this is a sustained move, or a bull trap?