Strong physical demand for gold supported the price of the yellow metal throughout the week. As correlation with U.S. equities and risk assets fall in tandem with stronger demand, particularly ahead of the Chinese Lunar New Years, gold could be moving toward the safe haven side, positioning the metal well ahead of market volatility and political risk.
After consolidating over Wednesday’s 200-day moving average, spot gold prices fell on Thursday. COMEX gold was trading down 0.6% or $10 to $1,649.90 by 3:11 PM in New York.
Two interesting trends have been guiding gold’s behavior as of late, according to UBS’ Edel Tully. On the one hand, gold could shedding its commodity mask. Correlation with the euro has fallen to 0.39, its lowest level since November. Gold’s positive connection to risk assets has been falling as well, as Tully explained:
Gold’s correlation with equities remains flat near two-month lows. Should this trend continue, and eventually lead to a collapse of gold’s highly positive correlation with risk, this would put the yellow metal on better footing to weather challenging macroeconomic conditions and overcome the threat of a stronger dollar.
In other words, gold, which has a dual nature, is beginning to swing away from its “commodity” phase and into its “safe haven” persona. This bodes well for gold as the euro could be in for further declines.
UBS’ FX analysts forecast the Euro-U.S. dollar exchange rate will hit 1.15 over the next three months on expectations of a 50 basis points rate cut from Mario Draghi’s ECB by April and central bank reserve managers cutting their euro holdings in the face of recent widespread S&P downgrades. The possibility of a Greek default on March 20 lends further credibility to their hypothesis.
Physical demand for the yellow metal adds another bullish force to the equation. Shanghai Gold Exchange volumes, consistently above average, are retracting a little ahead of the Lunar Holiday next week (which will reduce China’s ability to provide a price floor), but Indian demand remains strong, while two of the major ETFs, the iShares Gold Trust and the SPDR GLD both saw inflows. ”The Lunar New Year next week [will hit] physical demand from many centers, particularly China,” explained Tully, adding “hence if gold can end next week higher, it would be another positive sign.”
Gold miners have had a mixed start to 2012. Biggies like Goldcorp and Barrick Gold have remained in the green, while Newmont and Kinross have been pushed into negative territory.
Last year could have been one of the best in the yellow metal’s history, but two major corrections substantially cut its gains. Gold oscillated between risk-asset and safe haven, ending the year more in the former than the latter camp. As 2012 rolls on, gold investors are slowly, but surely, taking it toward the other side. If the yellow metal breaks that divide, it should do well in the face of politically-sparked market uncertainty. Read More
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