Over the past five days, Bitcoin has surged 7%, surpassing $64,000 for the first time since Aug. 26. Meanwhile, gold has hit an all-time high (ATH) more than 30 times this year, topping $2,600 an ounce. These remarkable gains mark the first time since Bitcoin's inception in 2009 that both have been the top-performing assets of the year, according to Charlie Bilello, chief market strategist at investment management and financial planning firm Creative Planning.

Gold is up 27% year-to-date, surpassing its 2020 performance of 25%. The last time gold outperformed was in 2007. So what's driving this impressive gain?

Gold has long been considered a hedge against currency devaluation and global instability. Current economic conditions suggest that gold is once again playing that role. The recent surge in gold prices could be attributed to these factors. Notably, gold began its rally before the significant currency devaluations caused by the Covid pandemic in 2020, while Bitcoin rose to stardom in late 2020 and continued into 2021. With Bitcoin now just 14% away from its ATH, is it trying to catch up again?

On closer inspection, Bitcoin's price tends to follow the US Federal Reserve's (Fed) net liquidity index. This index is calculated by subtracting reverse repo and the Treasury General Account from the Fed's balance sheet, showing that Bitcoin tends to follow liquidity trends.

Both Bitcoin and net liquidity bottomed out in late 2022, coinciding with the FTX collapse. Since then, Bitcoin has steadily increased alongside net liquidity, which now exceeds $6 trillion.

The Fed’s balance sheet now stands at $7.1 trillion, and while it is still tightening, the pace has slowed. The collapse of Silicon Valley Bank (SVB) in March 2023 reduced the balance sheet by $1.6 trillion, bringing it back to levels seen during the initial pandemic-response phase of quantitative easing.

The drawdown of the reverse repo balance (currently just over $300 billion) releases liquidity back into the financial system. This has a stimulative effect, increasing access to capital for lending, investment and economic activity in general.

More broadly, the combined balance sheets of the world's 15 largest central banks – including the United States, the European Union, Japan and China – amount to $31 trillion.

While this figure is not the focus, the trend shows a global resurgence in central bank balance sheets from around $30 trillion in July. Such a liquidity boost is particularly exciting for Bitcoin as it typically follows liquidity trends. Additionally, on Wednesday, the Fed cut interest rates by 50 basis points, further supporting the rising potential of Bitcoin and gold.

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