Is the perceived global slowdown that we are currently experiencing bullish for gold? So far, the market appears to be unsure, but this probably reflects several opposing underlying forces that are competing for attention.
Gold is currently around 3% off the end of April’s record high of $1563/oz. The stronger dollar explains some of this softer stance, the greenback around 2% higher over the past six weeks. Furthermore, we suspect that the hiking of margin requirements on silver has also been a factor in providing some underlying support to the gold price, even despite the fact that it has been softening. The recent rally had valued silver the most expensive vs. gold for thirty years and the correction in gold relative to silver has been the strongest since towards the end of 2008 when gold’s safety appeal was boosted by the drying up of liquidity in many markets. It’s notable that over the past six weeks, whilst global ETF holdings of silver have fallen over 10%, gold ETF holdings have held steady. Given the relatively tight correlation between the two over longer horizons, this also goes against the historical trend. Normally, one would expect it to have fallen with such a strong drawdown in silver.
But ETF holdings don’t tell the whole story by far, not least because, whilst gold ETF holdings fell in Q1, demand for physical investment increased substantially with Asia driving this trend according to last month’s World Gold Council report (China is the world’s 2nd largest consumer of gold,). As today’s data from China showed, inflation still remains high there and this remains the case across much of Asia excluding Japan. Combine with the fact that the dollar is struggling to maintain a strong safe-haven currency bid then it remains well supported, even if the global economy looks less assured.
