STRONG demand for gold from investors in recent weeks has been prompted in part by the current issues surrounding Greece. For much of the past year, if gold was rising then the US dollar was likely to be falling, given that gold is often used as a dollar hedge – especially during the unprecedented monetary expansion seen during the crisis.

However, Greece is not the only country that is at risk of its debt burden spiralling out of control and investors are justifiably concerned that the credit crisis could escalate into a debt crisis. These concerns led investors to the perceived safety of the dollar while the gold price has also been rising.

The simultaneous moves higher in both gold and the greenback are suggesting significant uncertainty and heightened risk aversion. The most significant previous episode when both the dollar and gold moved higher was during early 2009, just as equity markets were plunging to multi-year lows. While the current co-movement of gold and the dollar is not necessarily a portent of doom, it is a signal that the risks to the recovery need to be closely watched.

Market positioning suggests that strength in both the dollar and gold is likely to continue. CFTC data shows that speculators in the futures market remain net long of both assets, despite some paring of positions. Indeed, our own flow data shows that investors remain defensive. Holdings of gold in our physically-backed exchange-traded commodities have risen in recent weeks, remaining near record levels.

Meanwhile, we continue to see strong flows into our short G10 currency exchange-traded currencies, which are long of the US dollar. Trading volumes have hit record levels as more than 80 per cent of investors have positioned themselves for a strengthening US dollar over the past two months. Short yen-long dollar and short euro-long dollar are by far the most popular positions.

As long as the current uncertainty surrounds financial markets, defensive investments like the dollar and gold look more attractive, especially if both these safe-haven assets are trending higher together.