Now gold has finished its relentless march higher, traders have almost started to take stock of the wreckage of all other asset classes. It was inevitable after the huge surge in prices that, once the end came, the profit takers would be out in force moving prices significantly lower again. However, while the crisis of confidence continues throughout global markets, gold will still remain at the mercy of those seeking the safe haven and nothing else. Gold’s push can almost be tracked along with the volatility index. The more erratic and uncertain markets become, the higher gold moves.
Over the last couple of days, Goldman Sachs has raised its outlook for gold while downgrading its overall outlook on commodities. Again, this is not hard to understand. Europe is on the verge of a deep recession, with even those outside of the Eurozone at the mercy of poor growth and high debt levels. As a result, a slide in demand for major commodities is almost inevitable. Add this to the fact that this whole mess is nowhere near being resolved and you have a recipe for a lot more uncertainty and therefore traders flocking back to the king of safe havens.
In early September, gold bugs were rubbing their hands with glee as they watched the price of the yellow metal race to 1,900 $/oz. Expectations were high that the much-awaited $2,000 $/oz would be reached in short order, but since then gold has lost some of its allure. For many, gold had become the ultimate safe haven, with the world and his dog rushing to obtain some degree of protection from gyrating markets. When risk appetite reasserted itself in September, however, there was heavy selling of gold, particularly in the popular exchange-traded fund (ETF) arena, exacerbating the fall – with occasional margin hikes doing their bit as well. However, gold has recovered some of its form of late, pushing back towards 1,800 $/oz, now that the Eurozone crisis has flared up again. In addition, yield-seeking investors are still stuck in a world of low real interest rates, making gold attractive once again. Further, with central banks becoming seemingly more blasé about inflation, gold’s use as a store of value will also come into play. Many rushed to proclaim the gold bubble dead two months ago, but the obsequies performed over this particular asset may yet prove to be premature.
After the huge thrust towards the $2,000 level, gold suffered somewhat of a fall from grace on higher metal margins and as investors liquidated their gold profits in order to meet equity margin calls as stocks plummeted at the start of August. Gold is however still viewed as a safe haven asset choice and with Italian and Spanish bond yields rising yesterday, it could see more upside, having bounced from the $1,600 level. Data suggests that global holdings of gold in exchange-traded funds’ (ETF) are on track to see the biggest inflow of funds since July, adding weight to the view that the yellow metal is still seen as a safe haven play. From a technical perspective, a break back above $1,800 and then $1,840 could help to push gold back towards the $1,900 level. That said, the inverse relationship between stocks and the price of gold in the ongoing battle between “risk off” and “risk on” has become somewhat clouded of late. During the initial equity slump in August, there was a large recycling of capital from stocks to gold but in the last six weeks, that recycling is less transparent as equities have held up relatively firm in spite of the huge uncertainty surrounding the Eurozone. This is making gold more difficult to trade as the inverse correlation between stock prices and gold has become fragmented.
Gold has become stuck in a range due to the changing role of the dollar. In the past, gold has generally been inversely correlated to equity markets due to its safe haven perception. This correlation has been particularly strong during the recovery from the credit crunch recession, as the dollar has weakened due to stimulus measures, making it cheaper for buyers outside the US to purchase gold.
However, now US Treasuries have become the safe haven and this has strengthened the dollar in the process. Global economies have become highly indebted and less stable causing investors to shift their money to the largest economy in the world where default is unimaginable. Gold is still regarded as a risk-off asset in itself – although the stronger dollar is holding it back and causing the current trading range. In fact, gold is now moving broadly in line with equities as the Europe situation unfolds, bad news leads to euro and equity sell-off and dollar strengthening putting pressure on gold.
Medium to long term gold is more likely to push higher as it becomes more of a safe asset in itself due to impending US elections triggering further political uncertainty and putting the dollar out of favour.