Gold prices have been making unusual moves lately. Over the past two months, gold has risen and fallen parallel to risk assets like stocks and oil, leaving investors wondering if gold is starting to lose its appeal as a safe haven.
Traditionally, investors have used gold to balance the riskier holdings in their portfolio, since gold and stock prices tend to move in opposite directions in times of market uncertainty. The divergence between gold and riskier assets was especially apparent this summer — gold futures soared in the aftermath of the impasse in the U.S. debt ceiling debate and the U.S. credit downgrade, while stocks tanked.
By contrast, gold prices have recently dropped on days when stock markets were also falling. This may be because losses in riskier assets, such as stocks, were so high that investors were forced to sell their holdings in the futures market. Investors also fled to liquidate any holdings into cash on fears of a euro-zone country defaulting on its debt, according to a Wall Street Journal article on Tuesday. Another catalyst was the increased margin requirements from CME Group this summer. The exchange operator nearly doubled the cost of buying and holding gold futures, pushing some investors to sell off their gold assets.
However, according to analysts at Commerzbank, gold will “probably soon return to being a safe haven in times of crisis,” predicting that gold prices will rise to $1,800 a troy ounce by the end of 2011. The last time gold fell parallel with equities was in October and November of 2008 at the height of the financial crisis, and gold prices rebounded within one month, Commerzbank analysts wrote.
The analysts cited several reasons for potential upside in gold prices, including low interest rates, concerns in the euro zone and increasing dependence on gold imports from India and China. They also said further quantitative easing from the Federal Reserve would weaken trust in the U.S. dollar and prompt central banks to balance their currency reserves with more gold.
The precious metal seemed to restore its safe-haven status on Tuesday, when gold prices rose 2.9% as major U.S. stock indices fell around 2%. But by Thursday, it was back trading in line with stocks. As global equities soared, pushing the S&P 500 up 3.4%, gold followed along, closing up $24.20, or 1.4%, at $1,747.70 an ounce on the Comex division of the New York Mercantile Exchange.
