As gold continues to trade as a risk asset all eyes are focused on the FOMC meeting scheduled for later today and feelings are mixed as to what is likely to occur.
Author: Geoff Candy
Posted: Wednesday , 20 Jun 2012
GRONINGEN – In recent weeks, while the debt crisis in Europe has raged and the Greek electorate has been and gone to the polls (although the country is still without a government), proponents of gold as a safe haven have been rather surprised at the metal’s decidedly lack lustre performance.
Instead, it is becoming increasingly evident that at the moment gold is trading as a risk asset and, as such its major trigger point is centred on what the US is likely to do with regards quantitative easing.
As Scotiabank points out in its Metal Matters report for June, ” Considering the debt crisis in Europe and increased concern that Greece may end up leaving the Euro, it was surprising that Gold did not turn bullish more quickly. Indeed, it took a weaker than expected US nonfarm employment report on 1st June, to get Gold moving. This suggests that it is the allure of more quantitative easing (QE) that is driving Gold, more so than safe-haven demand, which again seems strange.”
It is with this point in mind that gold traders are so focused on what Fed chairman, Ben Bernanke is likely to say when he speaks later this afternoon.
Puru Saxena Wealth Management CEO, Puru Saxena agrees that gold is acting like a cyclical asset at the moment, rising along with other risk assets whenever stimulus occurs but, he is not expecting the announcement of QE3.
Speaking on Mineweb.com’s Gold Weekly podcast, Saxena said, “I don’t think that we’re at the point yet where there is enough pain for the Federal Reserve to unleash QE3. I would suspect that we’re going to see some other, softer form of easing, if [any] at all. ”
He added that while we may well see an extension of the Fed’s current “Operation Twist” programme an announcement of outright QE3 would be very difficult currently. As a result, he says, of this “you’re going to see a selloff in commodities and gold and silver which have been bid up in anticipation of QE3.”
So why the safe-haven about face?
For Saxena, much of the blame must fall to investors who, when faced with a credit strain, rightly or wrongly, still head for the US dollar and German bunds.
“In my view gold has been a play on liquidity. If you remember in 2008 when we had a crash in the financial markets the price of gold fell, it didn’t go up. The only two assets which went up were US treasuries and the US dollar, and last year when we had this problem in Europe, last autumn, winter and also this year, the price of gold has gone down and that tells us that gold really doesn’t rise during times of distress,” he told Mineweb.
Scotiabank agrees, adding, “Even when these safe-haven products became relatively expensive, with the real yield on short-dated bunds turning negative, Gold still struggled to attract safe-haven buying. This does suggest that deposit holders in periphery European banks do not see Gold as an alternative form of money, whereas those holding dollar reserves, such as central banks and sovereign wealth funds, see Gold as a hedge against currency debasement that QE causes.”
Where to from here?
Saxena believes that, like other risk assets, gold is in a base building process.
“If you look at the weekly chart for gold you will note that we’ve had three stabs at the low $1500 area. Unfortunately gold has broken below its 200-day moving average which is a few points higher, and the last time it did that was in 2008 in the global financial crisis,” he says.
Saxena adds, “For now, investors are quite happy to buy . 10-year US treasuries at almost 1.5%, so at least for the next several months I don’t really see any bond crisis developing in the US and I really don’t see any hyperinflation coming within the US within the next year or two. So I think unless we see some big easing from the Federal Reserve this week, whether it’s QE3 or some other form, that would certainly ignite a rally in gold and silver, but apart from that, I think the trend is down for now.
Scotiabank, is however, more positive in the longer term and sees a return to safe haven type trading later in the year, “The global economy seems far from healthy and the potential for further risk reduction seems high and that may well continue to weigh on Gold prices – at least at times. At some stage we expect Gold to become inverse related to the risk-on / risk-off trade,” it writes.
Adding, “The combination of the dire straits in Europe, the contagion that this is having on the global economy (as Europe’s import demand slows) and the upcoming US election, are likely to boost the need for a non-fiat asset, such as Gold.”
iPad Version: Picture – Gold Bullion from the American Precious Metals Exchange (APMEX) is seen in this picture taken in New York: REUTERS/Mike Segar