Rising Risk Appetite No Match for Gold

LONDON (Reuters) – Investors should be wary of calling a top to gold’s price rally, as the ease with which it has scaled fresh peaks even in the face of recovering risk appetite shows the breadth of underlying support for the metal.

Gold’s latest bull run, which has seen prices double since mid-2007, has been dismissed by some commentators as the ultimate bubble, a knee-jerk reaction to the panic that gripped financial markets after the collapse of Lehman Brothers in 2008.

Prices will come down again at some point, analysts say, most likely once the Federal Reserve makes serious moves to tighten monetary policy. But for now it seems curiously like all news is good news for gold.

“Even though equity markets are looking very perky, for gold you still have those big macro-financial issues that the markets are grappling with,” said Credit Suisse analyst Tom Kendall.

“In the Far East, particularly in China, inflation is still at the forefront of investor concerns. The U.S. dollar is there, particularly for North American investors. And in Europe, this issue of Greek debt is still playing into investors’ behaviour.”

The extreme risk aversion that battered cyclical assets in the wake of the credit crunch has since abated, allowing world stocks to recover and industrial commodities like copper to rally. Yet gold continues to climb.

Gold hit a fresh record above $1,500 an ounce on Thursday even as a resurgence in risk appetite sent equities sharply higher, with the precious metal’s traditional drivers — a falling dollar and rising oil prices — lending support.

Longer term, higher inflation, particularly in emerging markets, and further dollar weakness are both on the cards.

The dollar has struggled to benefit from the fledgling U.S. economic recovery that has lifted stocks and cyclical commodities this year. These assets are being helped in part by doubts that major tightening in U.S. monetary policy is imminent.

“The equity and commodity markets are still very much convinced that… the Fed will be there to support growth going forward, and that support is likely to come from ultra accommodative monetary policy,” said Deutsche Bank analyst Daniel Brebner.

“If you have got the monetary taps continuing to be wide open, why wouldn’t you be buying into the precious metals complex? I would argue that it’s a prudent move for investors to hold at least some of their portfolio in that asset class.”


The Fed doesn’t yet seem worried about having to raise rates to combat U.S. inflation. March inflation data suggested the United States is bucking the global trend for price pressures to rise, with underlying inflation largely in check.

But the accelerating inflation in Asia and Europe seen in March and price pressures in other key emerging markets like Brazil are positive for gold.

“The inflation angle does have some credence now,” said Matthew Turner, an analyst at Mitsubishi. “Inflation rates have picked up across the world, and in quite a few countries they are now above a level that is seen as low.”

“It is not obvious that policymakers want to deal with that, so that helps gold, more than other commodities.”

The dollar, meanwhile, has returned as a key driver of gold prices of late after the usual inverse correlation between the two assets disintegrated in 2009.

Gold’s 30-day rolling correlation with the dollar index was -0.2 on Thursday, against 0.5 last June. Having benefited from the risk aversion that hurt the dollar last year, weakness in the U.S. unit is now lifting gold as risk appetite picks up.

“Gold very much reflects the anti-dollar mood prevailing,” said UBS analyst Edel Tully in a research note.

“While the dollar’s weakness appears overdone, it is likely to remain under pressure, particularly versus the euro, unless the ECB deviates from its monetary tightening course.”

Moreover, the relative steadiness of gold’s recent rise – in contrast to its sharp, short-lived spike to a record in 1980 – points to a more sustainable picture for the metal than has previously been seen, analysts said.

“If the dollar decline and the inflationary trend were to reverse and the Fed announced big interest rate rises, we would see gold come off very quickly,” said Mitsubishi’s Turner.

“But because that chance is small and because you haven’t seen a huge flood of investment, there is probably less chance of a speculative pause when the price jumps back down,” he added. “It hasn’t been that kind of rally.”


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