Gold hasn’t lost safe haven status... yet

Spot gold slipped another $6 per troy ounce in early trade this morning and was trading at $1,582.50/oz at 10.25am UAE time (6.25am GMT) as global economic uncertainty continues to take the shine off the yellow metal.

In what appears to be counter-intuitive, gold has been losing value – instead of surging – even as the global uncertainty has been mounting, with analysts now beginning to doubt if bullion’s decade-long bull-run is already over.

The metal, which is down almost $340 per ounce after hitting a record high of over $1,920/oz last September, has been under fire in recent weeks and technical shorts – punters betting that its price will fall further in the future – are uncomfortably high, according to analysts.

“Despite the modest improvements of the past two weeks, speculative shorts are still uncomfortably high at 151.8 tonnes (12-month average is 106.6 tonnes), something which became readily apparent as gold sold off after last week’s FOMC announcement,” said Marc Ground, precious metals analyst at South Africa’s Standard Bank.

“ETFs continued as net buyers of gold, the longest streak since March, maintaining purchases at a solid 15.2 tonnes,” he added in his daily commentary on precious metals.

Does this mean that gold’s safe haven status is finally tapering off? Not really, says a UAE expert. “It is normal for gold to come down just because the demand for dollars (as it is priced against USD) is rising, but I don’t think we can make the statement that gold lost its safe haven status,” says Zeki Muderrisoglu, Fund Manager and Senior Technical Analyst, NBAD Asset Management.

Muderrisoglu suggests that the current demand dynamics in the light of euro zone uncertainty are pushing investors to the safer refuge of US dollars.

“This is up to demand and supply dynamics in the market and timeframe of investors. Cash instruments or cash equivalents (safer currencies, US treasuries and German Bunds) are currently in more demand, more accessible and investors are preferring them as they can shift to these assets relatively quickly compared to longer term safe havens,” he adds.

“Traditionally, when investors are in risk-off mode, they immediately turn to US treasuries, CHF, JPY and USD as safe haven assets,” he explains. “High dividend yield stocks, real estate, gold and silver might also come into this category, but they are not as easily accessible as cash and cash equivalents, also not all assets behave the same way at the same time,” he adds.

What is also ailing gold is the dampened demand from India, one of world’s largest gold consumer, due to a weaker rupee which is making gold priced in Indian rupees very expensive.

“Physical buying is significantly below “normal” levels, and gold imports into India continue to suffer as a result of the very high gold price in Indian rupees,” maintains Gerhard Schubert, head of precious metals at the Dubai-based Emirates NBD bank.

“Many analysts expect this trend of the Indian rupee to continue, which will further diminish expectations from the demand side,” he believes.

Overall, a lack of further quantitative easing by the US Federal Reserve acts a big catalyst in determining gold’s short and long-term price-points. “I am in danger of repeating myself, but it seems that QE3 is the difference between gold at $1,500 and $1,800. However, it would be much too easy and simple to lay the slump in gold prices solely at the doorstep of the Fed,” says Schubert.

Nevertheless, Schubert says that the yellow metal is holding well despite all the issues but a further downside cannot be ruled out. “There are pockets of additional demand in other South East Asian countries but they cannot take up the slack from the massive lack of Indian import figures. While the European currency issues can be expected to go on for some time, it is not certain how gold prices react to these issues. Some days the risk-on attitude prevails, while on others gold strongly follows the risk-off mode. Overall, gold is still holding reasonably well, but the dangers to the downside are increasing,” he says.

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