It would be tempting to ask whether gold really is still a safe haven asset. With events of epic proportions taking place in financial markets gold sits relatively mute with a price action defined by narrow ranges and declining volumes and volatility. Hardly what many would expect but then many things are behaving out of character.
The best explanation of gold's modest gyrations is quite simply that it is very simply trading inversely with the US dollar to the exclusion of almost every other influence that normally comes to bear on it. Prevailing dollar strength manifests itself best perhaps in India where prices are at or near all-time highs. The fact that gold anomalously mirrors the euro and equities is an indirect result of something else – and that is the dollar.
Perhaps more importantly are the incredible micro wafer-thin volumes – be they interbank trades, Comex futures volumes, physical flows or even mining equity trades. The gold market is soft – it is wafting. As such gold's technicals have less validity today than they do at other times – prices are very, very soft and liquidity non-existent as they are in other markets. There are not forces marshaled to attack/defend key levels – it floats gently. But don't take this seeming apathy as a sign that actually all is well with the world. Don't visualize a feather floating on a hot summer’s breeze.
Political and economic leaders are not covering themselves with glory over the crisis and with a constant and deafening barrage of bad news coupled with the increasing noise of the doomsters – then perhaps this is what shell-shock looks like. As the head of China Investment Corp. said: "more devastating than the economic crisis has been the handling of the economic crisis." But then it’s difficult to get consensus in Europe for a project which is fundamentally flawed and without populist support.
In short, gold has not lost its mojo, it has not lost its safe haven role – its simply doing what every other business sector is doing and just sitting on its hands. Our world at Sharps Pixley is awash with people we know in business who are simply biding their time – gold itself is no different.
What I am at a loss to explain to you is why physical gold flows in Europe have been quite so appalling in the year to date. Ask any refinery or physical trader. If I was holding euros myself I would be deeply uncomfortable and tempted to hold an increasing proportion in gold on the basis that there as some chance that they would all be valueless in a few months’ time. Whether that's a 5% chance or a 50% chance is a better of personal opinion/conjecture.
What we are sure of however is that the rationale for owning gold is better today than it was five and 10 years ago – and we see little prospect of that altering. The supply/demand balance remains deeply favorable and unlikely to change – and the chance that we will be back to sound money is equally unlikely for some years to come.
Ad Multos Annos
