Gold prices moved modestly higher this morning, adding about $3 to last Friday’s close. Last week ended with a slide in gold and other commodities prices on the heels of the credit rating downgrade of nine euro-zone nations. Though the downgrade was expected long before it occurred, it is still being seen as an affirmation that the situation in Europe is not improving and may in fact be getting much worse. Talks between Greek Bond holders and the struggling Greek government seem near collapse, which is again raising concerns about a Greek exit from the euro-zone and disorderly default. All in all, the improvement in the EU debt situation that was hoped for near the end of last year simply isn’t materializing.
This presents an interesting conundrum for gold, which has been trading more as a commodity and less as a risk hedge over the last several months. As we’ve been discussing for some time gold has been trading opposite the dollar and mostly in tandem with stocks and the Euro. The question is, when will gold reassert itself as a risk hedge?
We saw signs of life last week as gold actually traded with the dollar and opposite risk appetite for several of the last 10 trading days. This marked a significant shift away from the dollar trap gold has found itself in over the last several months. That said, it was not yet enough to break gold cleanly out of its’ trading range. At this point, investors still aren’t seeing gold as a solution to the problem of increased risk. That said, there is something seriously wrong with this picture.
For over 5000 years, gold has been seen as the safe haven for wealth storage. Throughout the last decade, gold prices have continued to climb in response to a variety of perceived risks across the world. There have been concerns about inflation, political unrest, money supply expansion, oil shortages, geo-economic collapse, war, and about a thousand other concerns that may adversely affect people’s investments. Through all of this, gold has played the role it’s supposed to play, the role of the ultimate safe haven asset.
The only thing that has temporarily changed this paradigm is the fact that the US dollar has been so inflated by money flowing out of the troubled euro-zone. The question is, how long can people keep parking their capital in US dollars, considering the worsening debt situation here at home? Our guess is not very long.
Another strong indicator is the simple fact that gold did not correct as heavily as many analysts were expecting. When the EU crisis began to unfold in the latter half of last year, many were calling for gold prices to slide all the way to $1200 per ounce. As it happened, they tested support in the low $1500 range three times before rebounding back into this comfortable trading range between $1550 and $1700. What this tells us is that there is still big money out there willing to bet that gold prices are too cheap at $1550 per ounce. This is not the sign of a market on the decline.
As it stands, gold has been essentially dormant for the last several months, waiting for a new surge of risk hedge buying. When and how that surge will occur is still up for debate. What we do know is that gold has played the role of the ultimate risk protection asset for thousands of years. It would be pretty difficult to assume that this role has simply ended for gold. If we start from this assumption, it follows that gold could be due for a significant increase in investment demand sometime in the near to mid-term. One thing we do know about this gold market is that once the upside moves begin, they tend to be fast and relentless.