Gold is currently trading at $1,223/oz and in euro, GBP, CHF, and JPY terms, at €1,017/oz, £840/oz, CHF 1,402/oz, JPY 111,318/oz respectively.
Gold has fallen in all currencies today as traders have taken profits after the recent surge in prices. Gold priced in euros, UK pounds, Swiss francs and US dollars surged to record nominal highs on Tuesday on demand for a store of value. Concerns of a global economic slowdown allied with fears that debt laden European countries like Greece, Spain, Portugal and Hungary could default and lead to contagion have led to safe haven demand for gold in recent weeks.
While Asian equities were mostly up overnight (except China despite healthy export figures), European indices are lower today after yesterday's slight falls in US indices. Gold's inverse correlation with equities over the long term is again being seen. Since mid April equities internationally, including the benchmark US indices the S&P 500, have broken down while gold has risen.
Gold can be correlated with equities in the very short term as seen during the current financial crisis when sharp falls in equities sometimes led to margin calls and speculative players liquidating long positions. However over the long term, gold is inversely correlated as was seen between 1970 and 2010.
In the 1970s gold outperformed equities which went sideways for the decade. In the period from 1980 to 2000, gold performed poorly while equities surged in value. Since the year 2000, equities have again underperformed. This lack of correlation is a key reason for having a small allocation to gold in a portfolio. Over the long term it has been shown to reduce volatility in a portfolio and enhance returns. Indeed, gold has outperformed the S&P 500 since 1970
The possible bankruptcy of global behemoth BP, a bluest of blue chip stock, is doing nothing to calm market jitters. A growing awareness of challenging financial and economic problems in an uncertain world is leading to a reevaluation of equity risk and financial risk and gold is benefitting from this reevaluation.
Markets await announcements regarding interest rates from the Bank of England and European Central Bank, as well as the press conference that follows the ECB decision. Interest rates internationally are set to remain near record lows for the foreseeable future and thus the opportunity cost of owning gold and forgoing a yield is negligible.
In the US, data on the trade balance and weekly claims for unemployment benefits will be watched and analysts expect the trade deficit to increase to $41.0 billion from $40.4 billion in March. The still very high and rising US trade deficit could stifle recovery and will likely lead to a weaker dollar and higher gold prices.
In a strange admission, Ben Bernanke said that he didn't "fully understand the movement in the gold price". Bernanke admitted that “there's a great deal of uncertainty and anxiety in financial markets right now." He said that "some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point." Bernanke was trying to allay growing concerns about the emergence of inflation and claimed that commodities had " fallen quite severely recently."
However, commodities and oil prices have not fallen severely and there are still elevated prices gradually feeding through into growing inflation. US wholesale food prices are up 6.8% in the past year. Food prices for the month of March rose by 2.4%, the sixth consecutive monthly increase and the largest jump in over 26 years. Food inflation will accelerate to a 5 percent annual rate by December and average as much as 4 percent in 2010, topping government forecasts as meat and dairy costs jump, said William Lapp, a respected food and agricultural economist.
Bernanke appears to be again exaggerating the threat of deflation in order to justify record low interest rates and the most expansive monetary policy in US history. He likely realises that gold is again the "canary in the coalmine" but obviously cannot say that publicly due to the obvious ramifications for the dollar. Bernanke should not be puzzled by record (nominal) gold prices with the US fiscal position as poor as it has ever been in history and deteriorating. The US debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report sent to Congress with understandably little fanfare.
Gold did not react to the new sanctions against Iran but the sanctions bear watching from a geopolitical point of view. Iran's central bank recently stated it might exchange its euro reserves for US dollars and gold. The Central Bank of Iran (CBI) intends on converting about €45 million of its reserves into dollars and gold, Tehran's media reported. The report was later denied but the possibility of Iran or another nation hostile to the US interests (Venezuela, North Korea etc) using gold as a geopolitical and economic weapon remains.
