Is Gold Losing its Safe Haven Status? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 7 July 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
The global markets ended the week on another poor note. US job creation was slower than expected, leading to higher risk aversion and falls in global stock markets. Another important asset fell too. Gold suffered a large fall at the end of the week, due to rising risk aversion.

Isn't gold supposed to behave in the opposite way? Surely it is supposed to rise when risk aversion rises and stock markets fall. As a safe haven commodity, gold is supposed to move in the opposite direction to stocks. The reason we are often advised to hold gold is so that it will act as a hedge to our stock portfolio, and perform well whenever times are bad.

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Lately, that has not been happening. In the past few months, gold has increasingly behaved like a normal risk asset. It rises when markets go up, and falls when markets go down. The change in gold's behavior has been gradual - it still has some safe haven elements to it. However, the majority of the time it behaves like most other commodities; i.e. as a risk asset.

What could be the reason for this change in behavior? And does this mean that gold is no longer the safe haven asset we expect it to be? To answer the first question, we need to think back to why gold would tend to rise on bad news. In the previous two years, a lot of bad news ended up leading to monetary easing by central banks, and the US Federal Reserve in particular.

As the US Fed cut interest rates and started engaging in quantitative easing, gold prices continued to rise. Bad news increased the expectation for further easing, leading gold to behave like a safe haven asset. Currently, the expectation for the Fed to engage in further easing is much lower than before. Recently, they haven't done further QE despite a deterioration in economic fundamentals.

Thus, whenever bad news occurs that doesn't raise the prospect of further monetary easing, gold doesn't rise. This is the reason gold has been behaving less like a safe haven asset and more like a risk asset. The Fed has already engaged in so much QE, that they do not appear to have the appetite for more. Its likely they would only do so if things get much worse, e.g. a US recession.

Gold is likely to resume its safe haven behavior only if it appears that the Fed will take further action. It may take much more bad news before this occurs. Until that time, we should probably expect gold would not behavelike the safe haven asset we have seen in the previous two years.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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6 Responses to "Is Gold Losing its Safe Haven Status?"

yellareddy

Jul 12, 2014

currently the dollar and gold are travelling in the same trend gold is moving up dollar moves up

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Jeyaraman

Jul 10, 2012

The main point here is, Gold is losing its momentum to stay back as a safe haven. As Asad said, Gold and stock prices/Dollar were inversely proportional to each other. In currency terms: Whenever dollar comes down Gold will go up. The main reason is due to risk aversion. ie., whenever people feel that the crisis associated with dollar they go and invest in gold. Conversely whenever the people feel that the crisis is associated with the other factors (example-Current slowdown in Euro-zone), they invest in dollar rather than Gold. But currently the dollar and gold are travelling in the same trend. It implies that the gold is losing and the dollar is gaining. The pace of upward momentum of Gold got reduced. Pinpointing the change in trend is more important to conclude.

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UNVALA

Jul 8, 2012

In present scenario GOLD is the best for investment.

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Rajeev

Jul 8, 2012

Dear Mr Assad,
After reading your article still have not understood as to why Gold should rise with Fed's QE?
Probably the doubt arises with my inability to understand as to why Gold is considered a safe haven and why it should rise when markets fall. Is it because all currencies are denominated in Gold? If so, then Gold would probably be the most easily converted asset?
Regards,
Rajeev

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Dr M.Chandrashekhar

Jul 8, 2012

Iam not a cat as far as Financials are concerned. My gut feeling is that Gold will maintain its status irrespective of any economic slow down

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Hasit Hemani

Jul 7, 2012

Arguments not convincing.Gold will remain a safe heaven no matter economy takes a plunge or buoying. Risk factor is minimum, almost zero in comparison to any commodity or else.If you can't make up your mind just go for gold, because its gold.

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