Gold Prices Sever Ties With Risk Assets
Gold prices climbed over $50 yesterday afternoon and nevertheless more this morning (26/10/11) amidst more concern over the EU’s debt crisis and disagreement between Germany and the rest of the EU.
Gold’s position in recent weeks as a safe haven asset has been heavily criticised as it has underperformed major currencies, fixed income products and crude oil. However investors have once again turned to buying gold as EU meetings are cancelled and US Consumer Confidence falls.
Last week gold had fallen more than 15% since hitting a record high of $1,920.30 on 06/09/2011, as the dollar strengthened and equities fell. Gold is now behaving like a safe-haven asset again since it appears to have severed its ties to risk assets. If this pattern continues after hearing news from the EU meeting due to take place this evening, we could well see gold prices continue to climb.
When rumours were circulated about a Euro Zone rescue fund, this was bearish for gold; however now we have been told that German Chancellor Angela Merkel disagreed with a phrase in the draft conclusion for Wednesday’s EU summit that calls for the European Central Bank to keep a buyer of bonds in the secondary market. It seems investors are no longer accepting the procrastination of politicians and are instead seeking safe-haven assets however again.
Japan’s finance minister has instructed his staff to be ready to intervene and stop further appreciation of the Japanese Yen, due to Japans’ slowing export growth. Gold, the JPY, the CHF and US Treasuries are widely recognized as the world’s principal safe-haven assets. By intervening, Japan has effectively degraded JPY’s safe-haven position which is bullish for gold.
Along with concerns over the debt crisis in the EU, attention could also now be drawn to the unresolved US problems in addition. With the focus predominately on the meetings in the EU recently, the US and its debts seem to have been overlooked.
The rising debt-to-GDP ratio is the clearest indication of the country’s deficit problem, and gold prices react to this; if the US fail to reach the 1.5 trillion deficit regulation target, this could rule to credit rating agencies re-examining US ratings, which could cause a gold rally. If gold re-emerges strongly again as a safe-haven asset we should see bulls investing in gold and rebuilding long locaiongs.
Gold prices were also boosted by Indian need as they prepared to celebrate the festival of lights today (Diwali). The festival of lights is typically considered a good time to splurge on gold and nearly 35 kilograms of gold was sold on Monday.
In Mumbai, need for gold coins was so high on Monday that queues were witnessed outside big jewellery stores late into the evening, snaking over half a kilometre outside many stores.
in any case the outcome from this evenings talks, with all this volatility it’s getting harder to work out what gold’s reaction will be. It seems that gold is moving around trying to establish a new level and while that is going on gold prices will not move in line with other assets in a normal way.