Gold may regain its status as a refuge by the end of the year, analysts say, although investors should expect more volatility in prices in the short term as the metal retains its correlation with risky assets.
In recent months, gold has traded at par with industrial metals stocks as investors seek cash due to fears of debt crisis in the eurozone and the overall slowdown.
The correlation with the risk has raised questions about the status of gold as a haven of value, but analysts say the metal purchases made by central banks such as Mexico, Ukraine, Kazakhstan and the Philippines, as well as demand from emerging economies indicates a belief in long-term safety of gold.
According to IMF figures presented last week, Mexico, Kazakhstan and Ukraine were active buyers in the gold market in April, while the Philippine central bank increased its reserves by more than one million troy ounces in March. This was the seventeenth consecutive month that the Filipino bank added over one million troy ounces to its reserves.
Mexico’s central bank bought 94,000 ounces, bringing official reserves to 4.04 million ounces. Kazakhstan totaled 65,000 ounces to its reserves, which were located at the end of April at 3.16 million ounces. Ukraine reserves grew by 45,000 ounces to 984,000.
The correlation of gold with copper, which is often considered an indicator of risk appetite and a barometer of economic health, has strengthened since the beginning of May, as fears intensified output Greece the euro area.
According to Standard Chartered, based on daily returns for the last three months, the correlation of the Comex gold to copper in London Metal Exchange remains at 0.5, vs. 0.4 on May 3 . A year ago, the correlation of gold with copper was 0.3.
Correlations measure the relationship of the movements of two assets. If assets move in sync, rising and falling together, their correlation is 1. The assets move exactly in the opposite direction have a correlation of -1, and the assets that move independently of each other correlations are 0.
Gold was trading around U.S. $ 1,575 per troy ounce, down 5.4% since the beginning of May after sales-led funds, and only 0.7% above levels in early January. In the first three quarters of 2011, when refugee status was intact gold, gold rose by 14.3%.
In the short term, gold is vulnerable to macroeconomic changes in perception, said Robin Bhar metals analyst of Société Générale. However, he noted that gold can regain its status as refuge after major events leading to risk aversion, and mentions the correction and recovery of gold after the collapse of Lehman Brothers in September 2008.
According to Bahr, a return to price between U.S. $ 1,640-US $ 1,660 an ounce would be the minimum necessary in today’s markets to indicate the return of shelter operations.
Climbing occasional periods of risk aversion, such as the rising price of gold in the 17 and 18 May show that gold is still considered a safe haven, but behind the dollar and German bonds, analysts said.
The commodities analyst at OCBC Barnabas Gan said the bank believes that gold prices will rise in the second half, fueled by a demand for safe havens.
“We’re still waiting for a price of U.S. $ 1,800 an ounce by year-end indicating a return of operations to safe havens,” he said, citing a potential third round of quantitative easing, or QE, by United States as a “turning point” in the way investors view gold. “If another round of QE, we could see a strong interest in gold as a preferred safe haven asset as opposed to the dollar,” he said.
IG Markets said recently that 83% of their clients have long positions in gold, indicating that they are prepared to deal with volatility in anticipation of an acceleration in demand.
“The precious metal has been a solid long-term commitment and has regularly referred to it in times of economic crisis. There is no reason to suggest that this should change dramatically given the strong fundamentals of tight supply and strong demand from countries like India and China, “said market strategist Justin Harper.
by Jay Thadeshwar, My Profile