Questionable safe haven status of gold

While all the spot base metals posted gains on balance last week, gold ended almost unchanged and the other precious metals ended the week lower compared to the preceding Friday. This leads to the question whether gold is really a safe haven in times of increased risk.

The major concern during last week was the development in Japan after a major earthquake and a tsunami have hit the northern part of the Honshu Island. Both triggered a major incident at the Fukushima nuclear power station. The developments at this power station and the risk of a nuclear meltdown were the dominating factors in many markets and eclipsed the unrest in the MENA region.

Normally, this is a situation, where many expect that gold and the other precious metal would perform well and provide protection. However, gold was not the safe haven and was in a roller coaster. We have pointed out several times that gold is also a risky asset. A rise of volatility indices like the VIX is often accompanied by falling gold prices. The same applies for the other precious metals. Falling stock markets are often negative for the precious metals. This has been especially obvious last Tuesday, when stock markets tanked after a statement of the Japanese PM. And it was also the case after comments from EU commissioner Oettinger on the situation in Japan hit the wires. One possible reason for this link could be that stock investors might have to sell other assets to cover the losses suffered in stock markets. This could not be ruled out as some stock markets traded more than 10% below recent highs.

However, with plummeting equity markets, the risk inversion of investors increases and investors not only sell stocks but also other risky assets. And gold is one of those risky assets. This is underlined by the latest CFTC report on the “Commitment of Traders”. During the week ending March 15, the day gold hit the low of the week at 1385$/oz, large speculators reduced long positions by 12,773 to 240,661 contracts and increased short positions by 3,596 to 66,090 contracts. Thus, their net long positions dropped by 16,369 to 174,571 contracts. Also the gold holdings of the SPDR Gold Trust ETF declined further until Tuesday, but rebounded during the second half of the week.

 The stabilization of stock markets was very helpful also for gold. A further recovery of equity markets could lift gold further up. A rebound of automotive company share prices would also be positive for the PGMs as their price development is correlated with the price trend of car manufacturers. The latest news concerning the situation in Japan indicates that stock and precious metals markets might recover further. However, set-backs can not be ruled out.

Another geo-political risk factor is back in the spotlight. After the UN passed a resolution concerning a no-flight zone over Libya, France started military strikes against Libya and the UK and US forces joint them later. Last Friday, crude oil prices declined after Gaddafi announced a cease-fire. The military strikes against Gaddafi’s troops could lead to further decline of oil prices, which would be positive for stock markets. However, the impact on gold might be ambiguous as rising crude oil prices tend to increase the demand for gold as a hedge against inflation. However, in the current environment, the impact from rising stock markets might be the dominating force.