- Gold a safe haven?
- Gold is predominately driven by US Fed rate hike expectations…
- …and it did not live up to its safe-haven status
- We see lower gold prices going forward
Gold a safe-haven?
For some years, we are of the opinion that gold’s safe-haven status has been reduced significantly. The gold market has dramatically changed with the arrival of gold products that opened the market to a wider public. Gold is not only bought as a protection for uncertain times but also for speculation purposes. The latter goes completely against gold’s safe-haven character and at times it more than overshadows it. For example, at the height of the global liquidity crisis (when there was a shortage of liquidity) gold prices dropped sharply because investors valued cash more than gold. This suggests that at times of severe crises, gold cannot live up to its safe-haven status. The graph below shows that the trajectory of the gold price has coincided with a buildup and liquidation of outstanding investor positions in gold. This is not a positive development for a safe-haven asset, because significant investor activity indicates that it is used for speculation rather than safe haven. Indeed, if you were to buy gold for safe-haven purpose you would invest in physical gold and not in a gold-related product.
Gold more driven by Fed rate hike expectations
Last week, gold prices rallied considerably when US CPI came in below expectations and financial markets judged that the FOMC minutes were more dovish. This and the deterioration of investor sentiment since then have resulted in a downward adjustment in US Fed rate hike expectations this year. This has weighed seriously on the US dollar and therefore also supported gold.
Why did gold not rally further?
Gold prices did not rally further because of the following reasons. First, there was not a global panic or a severe systemic crisis that was reflected across all markets. In currency markets we argue that the movements were mainly the result of closing of positions, but not because of aggressive safe-haven buying. In the case of gold, net-positioning has been relatively small. Compared to the euro and the yen, there were therefore fewer positions to squeeze. Another explanation is that the weakening Chinese demand outlook outweighed safe haven-demand. For example, palladium prices were the weakest among precious metals because its substantial exposure to the demand outlook in emerging markets. They have dropped by around 13% since the close of last Thursday.
We expect gold price weakness to resume
The recent developments have not altered our outlook for precious metal prices. With financial markets now attaching a lower probability to a Fed rate hike this year, the market impact will be more substantial if the Fed decides to hike s we still expect. Then, financial markets will adjust upwards their interest rate hiking expectations for this year and next year. This will spur the US dollar and result in lower gold and other precious metal prices. So we remain confident about our forecasts.