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In comparison to other commodity classes the gold price has held up fairly well today. It is close to its highs of the day, whereas Brent crude has fallen $2 per barrel so far and copper has fallen to its lowest level since December 2011. Gold seems to be diverging from the oil price, after having a fairly loose positive correlation in recent months. So why is the gold price showing this resilience and is it going to last? We analyse the pros and cons for the yellow metal below.
Gold and Oil - normalised to show how they move together; they have diverged recently.
Source: Bloomberg and Forex.com
Why gold could perform well?
1. If Spain requires a bailout this is SERIOUS. It is the fourth largest economy in the Eurozone; estimates suggest it could require at least EU400bn in funding to keep it out of the markets for the next three years. Greece is perfectly manageable, Spain is not. There is no clarity that the EU has the will (or the funds) to save Spain, and if it gets into even more trouble then we could see the end of the currency bloc. Thus, as the Eurozone crisis deepens people worry about the future of the euro and may start thinking of gold as a safe haven once more. Although the yellow metal has been anything but a safe haven in the past year, it could redeem itself if Spain gets into trouble.
2. From a technical perspective gold looks oversold. The MACD on the weekly chart is in deep oversold territory. Added to that the 100-week moving average is currently acting as good support at $1,530. The market may respect this respect level, and the steep decline in price could be starting to attract bids.
3. Gold and oil share some characteristics but not all. Gold is not an industrial metal, oil is, thus gold is better protected from a sell off during an economic downturn compared to other commodities.
4. Its correlation with other risky assets including oil and the S&P 500 is fairly weak at 11% and 17% respectively since the start of the current quarter. Thus, just because other commodities are selling off does not mean that gold will follow suit.
But gold has been a fairly poor safe haven and store of value since touching $1,900 per ounce in September last year. Can we rely on it to perform this time?
What could hinder gold's performance?
1. Although the correlation between gold and oil tends to be fairly weak, it has a stronger negative correlation with the dollar, and tends to move in the opposite direction to the buck about 50% of the time. Thus, if the dollar continues to attract safe haven flows the gold price may suffer.
2. Gold positions tend to be more expensive to hold than FX positions etc.; hence the yellow metal can be sold off during times of market stress as investors sell it to fund losses elsewhere. It's hard to measure exactly how much this impacts the gold price, but it is worth remembering. When you are in trouble you want to sell your most profitable assets, or get rid of the ones that eat up most of your capital.
3. According to positioning data on the CFTC, non-commercial long positions of gold have fallen sharply as investors turn bearish on the metal, but they are not as low as they were back in December 2008 at the peak of the financial crisis. Thus, there may be room for a further reduction in long gold positions, especially if the Eurozone sovereign crisis takes a turn for the worst.
In conclusion, I believe the future for gold is probably down, especially if the Eurozone crisis steps up a gear and Spain's bond yields rise further. There is some fairly sticky support around $1,500, but right now the outlook remains very cloudy and we believe there could be a few more bad weeks for risk to come.
But, if there is 1, a bailout announced for Spain that seems sustainable or 2, the announcement of some EU-wide action like bank deposit insurance or Eurobonds, then we could see risk start to rally. Resistance lies at $1,600 then at $1,650 - the bottom of the Ichimoku cloud. But if there is a rally then gold may lag, as its positioning is not as stretched as some other asset classes, for example short euro positions are at a record high.
Gold: weekly chart
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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