Gold sought as safe haven but rose less than expected

The major factor for commodity markets is currently the unrest in Libya. Revolution leader Gaddafi has lost control of most parts of the country, but is defending his position in the capital Tripoli. This political tension has an impact on commodity prices, but not all commodities profited. Gold and silver were sought as safe haven, but the price increase was disappointing as gold rose by only 1.6% on the week and silver by 2.3%.

The unrest in Libya led to a loss of crude oil production by about 600K to 800K barrels per day. However, the oil market feared that riots might break out also in other oil producing countries in the Middle East and North Africa. Brent surged to as much as120$/bbl but came down again as Saudi Arabia announced to increase production by 700,000 barrels per day and thus nearly compensating the production shortfall in Libya. Nevertheless, Brent ended the week at 112.43$/bbl, which is 9.7% higher than one week ago. The spread of Brent over WTI increased again to 14.19$/bbl.

The surge of crude oil prices will have an impact on headline consumer price inflation in industrialized and emerging economies around the globe. Thus, one would expect that gold were rising stronger. The argument that central banks would have to hike interest rates now even more is not a convincing argument against buying gold. The Fed is clearly focusing on the core PCE inflation rate. The rise of crude oil prices is unlikely to derail QE2. The soaring energy prices are likely to have a dampening impact on GDP growth. In the case that central banks try to fight the impact of higher crude oil prices on headline CPI inflation, they are likely to reduce GDP growth even more and could drive their economies into a recession. Therefore, central banks might accept temporarily higher headline inflation as long as core inflation remains well behaved. The hypothesis that the global economy would enter a period of stagflation is already spread around. You guessed right, the “new normal” is dead and the PIMCO snake oil salesmen have a new medicine to promote. But if one is expecting stagflation, then the better alternative is buying gold and silver instead of PIMCO funds.

Platinum and palladium suffered under their industrial use and could not post a gain on the week. Platinum lost 1.7% and palladium plunged by 7.1%. Again, the price moves of car company equities was a good guideline for the PGMs. The market fears that higher costs for fuel would reduce expenditures for cars and that automotive manufacturer would buy less platinum and palladium for catalytic converters.

The fear that soaring oil prices would lead to a slow-down of global growth or even to a recession in some countries had also an impact on the demand for gold and silver. Despite being bought as a hedge against inflation and as a safe haven, our quantitative fair value models show that stock market movements also have an impact on precious metals. The plunge of stock markets last week has thus also exercised a dampening impact on gold and silver. However, this does not appear to be sufficient to explain the meager performance of gold and silver during a crisis, which should lead to a stronger rise. The key are again investors. While the latest CFTC report on the “Commitment of Traders” shows an increase of the net long position held by large speculators by 7,580 to 180,424 contracts, the holdings of the largest gold ETF, the SPDR Gold Trust, dropped by 11.5 to 1,211.6 tons. Two hedge funds had invested massively in this fund. It appears that at least one of them is continuing to liquidate gold holdings. For the time being, those liquidations are likely to remain a drag on gold, but do not necessarily prevent a new record high of gold in March.