Gold as safe haven

As I’ve been mentioning for a few weeks, there have been signs that gold is re-gaining its safe haven status. The big difference between now and early 2008, when the stock market tanked and gold shot up to $1033, is that the dollar was falling then. Since the crash in Oct 08, the dollar has risen as a safe haven when risk aversion sentiment increases and in anticipation of the Fed raising rates.

Yesterday the S&P downgrade of Greek bonds to junk was a trigger in another bout of risk aversion that took the wind out of equities. But shortly before the announcement and then during it and afterwards, gold moved strongly through resistance at $1160 and even went as high as $1172. Interestingly, silver declined a bit and was generally choppy at its current high level. Lately silver has been less volatile than gold, which is unusual, and on the whole has not been as susceptible to down moves. Conversely, it didn’t move up as much either yesterday.

In short, yesterday was a clear signal that gold is separating from equities AND the dollar and beginning to shine again as a safe haven. This is not the same as saying that gold is the answer if Europe crashes.  Severe issues in Europe mean that the dollar will strengthen off of Euro weakness and that will hurt commodities and hard assets. But there is some glimmer of hope that gold may not suffer as much. And it strengthens the possibility that we might see a spike in gold in the near future.

Even in Oct 08, gold suffered the least of all commodities, and one would think that was due to its nature as a monetary alternative. Interestingy, gold fell about as much as the dollar rose, whereas silver, oil and all other commodities got crushed. Then it recovered quickly and stayed strong as equities continued on to their low in March 09. Since March 09, most asset classes have risen together and gold achieved a new high in December. That gave the impression that re-flation was fueling gold’s rise along with equities, especially as the dollar began to rise in December and gold fell.

Take a look at these charts of yesterday’s action, courtesy of Ino.com. First, the dollar, then gold, then oil.

Again, yesterday was NOT an all-clear signal for gold. The dollar will benefit as a safe haven and as the counter-balance to a falling Euro. But if gold also acts as a safe haven, then it could be reasonable to expect it would maintain some kind of parallel strength with the dollar. This line of thinking could reduce the risk of significant down moves in gold.

Certainly another factor in the mix is the overwhelmingly popular opinion that the dollar is in trouble too. The US debt looks staggering and the Greek crisis has underlined the sovereign risk of nations like the US and UK. While markets love to move in opposition to popular opinion, meaning the dollar could rally significantly, it is possible that gold will see some panic-driven spikes up, especially since US Treasuries have been quite weak (until yesterday of course, but the trend is down). With signs of a strong recovery in consumer spending and corporate earnings, the anticipation of inflation is increasing.

There is also a lot of chatter about China re-valuing the Yuan, which in essence weakens the dollar and gives China even more power to buy commodities. This may or may not happen any time soon, but markets anticipate such things. And let’s not forget the commercial short position in the Comex is at all-time highs, which leaves open the possibility of a short squeeze (yesterday could have been a small example).

All of this adds a nice pillar of support to gold, and somewhat increases the possibility of a spike up, along the lines of a near-term peak at $1350. This does not mean it will happen. But as time goes by the odds are getting better.

This entry was posted on 28/04/2010 at 06:56 am and is filed under Gold, Dollar Collapse. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.

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