Gold Rises But Lags Safe Haven Gains

Gold isn’t behaving like a safe haven should. While investors have endured torrid times as global equity markets have slumped, even worse tribulations may be required for the precious metal to regain its past luster as a safe haven.

Its price is down more than 3 percent since November 2015, even as the S&P 500 Index has declined 8 percent. And on Jan. 20, when a global equity rout pushed the MSCI World equity index down more than 3 percent, gold’s rebound fell almost $3 short of highs set earlier in the month.

There are good reasons why investor panic is not translating into a bigger bounce in gold.

First is the dollar’s rise. Gold is priced in dollars and usually weakens when the greenback strengthens. For example, the metal has risen nearly 5 percent in sterling terms since November. And now that Federal Reserve Chair Janet Yellen has raised U.S. interest rates, it is a bit less attractive to pay to store and insure gold holdings.

Asian demand for the metal is also expected to be dented. Chinese retail investors, who tend to buy gold speculatively, have been burnt by domestic stock market gyrations and may be more cautious as domestic growth slows. Investors have no interest in buying it as a hedge against inflation in the western world, and in any case, any pickup in inflation would signal stronger economic activity and spur investors to buy riskier assets than gold.

via Reuters

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza