- Only modest safe-haven demand, because of a lack of panic
- Different drivers oppose each other
Safe haven demand?
The weakness in emerging market currencies, inflation fears in some emerging economies, weaker-than-expected US data, concerns about China, lower US equity markets and higher equity volatility have not resulted in a strong rally in gold prices. Usually such combination would be quite bullish. This time around, these drivers have supported gold prices somewhat, but a strong rally has been absent so far. One would wonder why? There are several reasons for this. For starters, financial markets are not in a panic mode. Yes, equity volatility has risen, but liquidity spreads have remained low and volatility in USD/JPY is still at relatively low levels. Moreover, the Japanese yen has received support, but not to the extent you would have expected in a wave of risk aversion. In a way financial markets are signaling that they are concerned about the recent developments, but they remain confident that a real crisis will be averted. The stabilization of USD/INR within the emerging market currency sphere may be the reason of this confidence. As a result, gold as classic safe-haven asset has only been modestly supported.
Different drivers oppose each other?
Another reason for gold’s behaviour could be that different drivers are opposing each other. Some safe haven demand, weaker US data and weaker equities have supported gold, but this was being offset by a stronger US dollar and fears that demand from China may be lower this year.
Real yields being a strong driver?
Last but not least, gold prices could be driven by another driver than the above mentioned ones. The graph below shows the relationship between 5-Y US real yields (inverse scale) and the gold price. Since 2011, they have moved in tandem most of the time. This has also been the case since the end of last year. Gold prices have started to recover at the moment that the 5-Y US real yield has started to move lower mainly because of lower US yields on the back of weaker-than-expected US data and some safe-haven demand. As we expect US data to recover and the overall investor sentiment to improve, the 5-Y US real yield should start to rise again. This will put gold prices under pressure again.
All in all, we judge that it is not a good sign that gold prices have not rallied so far in the current “supportive” environment and we judge that the downside risks will likely increase again once investors become impatient.