Precious Metals Back in Favor as Volatility Rises

In the recent round of market turmoil, the price of gold price has struggled to shrug off its correlation with the U.S. dollar, but as bond and equity volatility persist, investors’ are eyeing up its safe-haven potential once again.

Stronger-than-anticipated jobs numbers out of the U.S. and rising government bond yields weighed on the gold price last week, but as Greece worries refuse to go away and other asset classes are offering little protection, investors are taking a second look at gold and other precious metals.

Gold and silver prices have moved between gains and losses this week, as the 10-year German government bond yield broke through the significant 1 percent barrier for the first time since September 2014.

While gold’s upside has so far been capped by the gains seen in the U.S. dollar — a stronger greenback tends to push bullion prices down — the outlook for the rest of year is positive, according to analysts.

“It would be wrong to conclude that the outlook for the gold market over the remainder of 2015 and beyond depends solely on the evolution of U.S. monetary policy, and that Fed tightening can only mean lower prices,” said head of commodities research at Capital economics, Julian Jessop.

“What’s more, even over briefer periods, safe-haven demand and buying from key emerging markets can more than offset headwinds from developments in the U.S.,” he added.

Demand for gold could also increase as an inflation hedge when the Federal Reserve raises rates as a result of inflation picking up, Jessop said.
Another factor for the metal is global central bank buying, led by Russia. The Russian central bank has been bulking up its gold supply in an effort to diversify away from U.S. dollar holdings, which will also likely support the price of bullion this year, according to analysts at the group.

Inflows into gold exchange traded products, or securities that track an index or asset, have also ticked higher in the last week according to data from ETF Securities.

Last week there was a $5 million net inflow into long gold ETPs as well as around $10 million out of short gold ETPs, or products used to predict a fall in the price of gold.

“Gold is still viewed as a very defensive safe haven asset, but I guess at the margin, that U.S. dollar strength has limited any upside,” said director of research at ETF Securities, Martin Arnold.

“In the last week, we have started to see more inflows into gold, modest inflows, but that’s generally how it starts. We did see more optimistic positioning in terms of the flows, people taking their shorts off and adding to longs,” Arnold said, who sees gold trading up from current levels of around $1,180 to $1,300 by the end of the year.


Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.