Gold Poised to Regain Safe-Haven Status

May 28, 2012 at 18:29

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Gold could regain its safe-haven status before the year-end, analysts say, though investors should expect further near-term price volatility as the metal maintains its correlation with risky assets.

In recent months, gold has traded broadly in line with industrial metals and equities as investors seek cash due to fears over the euro-zone debt crisis and slowing global growth.

The correlation with risk has raised questions over gold’s status as a store of value, but analysts say central bank buying from countries including Mexico, Ukraine, Kazakhstan and the Philippines, and demand from emerging economies indicates faith in the long-term safe-haven trade.

According to data from the International Monetary Fund released last week, Mexico, Kazakhstan and Ukraine were active buyers in the gold market in April, while the Philippines’ central bank lifted its reserves by more than one million troy ounces in March. It was the seventh consecutive month the Philippine bank added to its official gold reserves.

Mexico’s central bank bought a net 94,000 ounces, taking its official reserves to 4.04 million ounces. Kazakhstan added 65,000 ounces to its reserves, which at the end of April stood at 3.16 million ounces. Ukraine’s stockpile rose by 45,000 ounces to 984,000 ounces.

Gold’s correlation with copper, often seen as an indicator of risk appetite and a bellwether for economic health, has strengthened since the start of May, as fears over a Greek exit from the euro zone intensify.

According to data from Standard Chartered based on daily returns from the past three months, Comex gold’s correlation with London Metal Exchange copper stands at 0.5 compared with 0.4 on May 3. A year ago, gold’s correlation with copper was 0.3.

Correlations calibrate the relationship of the movements of two assets. If assets move in sync, rising and falling together, their correlation is 1. Assets that move in the exact opposite direction have a correlation of minus-1 and assets that move independently from one another have correlations of 0.

Gold is trading at about $1,575 a troy ounce, down 5.4% since the start of May following fund-led selling and just 0.7% higher since early January. In the first three quarters of 2011, when gold’s safe-haven status was largely intact, gold rose 14.3%.

Three-month London Metal Exchange copper is trading around $7,750 a metric ton, down 7.7% since the start of May and about 2.0% higher since early January. In the first three quarters of 2011, copper fell 26.9% due to escalating fears over the euro-zone debt crisis and a faltering U.S. recovery.

In the near term, gold is vulnerable to shifts in macroeconomic sentiment, Societe Generale Metals Analyst Robin Bhar said. However, he noted that gold can regain its safe-haven status following major risk-off events.

He cited gold’s correction and recovery following Lehman Brothers’ collapse in September 2008 as an example of gold’s ability to reassert its safe haven status after a period of trading in line with risky assets. Gold surged on safe-haven buying in the immediate aftermath of Lehman’s collapse, before falling over the following two months amid cross asset class liquidation. It then resumed its uptrend in December 2008.

In Mr. Bhar’s view, a return to prices of $1,640-1,660 per ounce would be the minimum necessary in today’s market to indicate the return of the safe-haven trade.

Occasional rallies in risk-off periods, for example gold’s price surge May 17 and 18, show that some still see gold as a safe haven, albeit after dollars and German bunds, analysts said.

OCBC Commodities Analyst Barnabas Gan said the bank believes gold prices will rise in the second half, spurred by safe-haven demand.

“We’re still looking at a $1,800/oz price for the end of the year…which would indicate that the safe-haven trade has returned,” he said, citing a potential third round of U.S. quantitative easing as the “game changer” in the way investors view gold. “If there’s another round of QE, we may see stronger interest in gold as a preferred safe-haven asset in contrast to the dollar,” he said.