London - Extreme strain in the global economy has given way
to something less hair-raising. So does the last investor in "safe
haven" gold switch off the lights?
After a storming start to 2012, bullion prices have lost some
of their lustre in recent weeks in line with a reassessment of global economic
health.
Jumbo-sized liquidity taps are off in Europe, while the jury
is out on a further round of US quantitative easing.
US data shows a slightly improved trajectory, with
employment numbers and consumer credit growth highlighted in a key year for
President Barack Obama.
Treasury yields reflected that, breaking out of the doldrums
and raising potential for tigher policy down the road.
Given that backdrop, it is no surprise that gold has
retraced since touching a record $1 920.30 an ounce in September 2011.
Gold is currently trading at around $1 660/oz.
"Gold is now facing all of these risk reduction
measures, so I'd expect the market to be temporarily subdued," said Ashok
Shah, investment director at London and Capital Fund.
Risky relations
But gold's changing relationship with risk might just be key
to it ditching its "open only in case of emergency" label, as
economies take a breather from panic caused by Europe's debt crisis.
Gold has baffled market watchers, particularly in the last
six months, by refusing to behave as a traditional safe haven and taking its
cue from either the euro or stock markets.
The correlation between gold and the Standard & Poor's
500, one of the broadest measures of US equity market health, has spent most of
the past few months in positive territory, meaning gold is more likely to move
with US blue chips than something less tangible like, say, investor fear.
Since the late 1960s, gold has on average traded inversely
to the S&P roughly 60% of the time.
But this correlation has eroded to the point where between
2001 and 2011, the days on which gold was positively correlated to the S&P
outnumbered those on which it was negatively correlated for the first time in
history.
On a rolling one-month basis, in the 10 years between 2001
and 2011 gold traded together with the S&P just over 50% of the time,
compared with 49% in the preceding decade and 46% of the time in the decade
before that.
If nearly 40 years of history are anything to go by, in the
coming 10 years this positive correlation should strengthen even further.
New reality
Near-term, any asset can be vulnerable to corrections as the
market readjusts to a new reality, or even the perception of a new reality, and
gold is no exception.
Catherine Raw, a co-manager of BlackRock's Gold &
General Fund, said reassessment of QE from the Fed has been instrumental in
pulling gold down, but ultimately, longer-term factors that fed the quadrupling
in the price since 2000 are still core.
"It really comes down to two things. One has been the
interest rate environment," Raw said, referring to the rate of inflation
outpacing benchmark interest rates in large parts of the developed and emerging
world, eliminating the opportunity cost of holding non-interest bearing gold.
"The second is diversification," she said.
"For a lot of investors, particularly in the West, we are going from
growing assets to trying to protect them.
"It's about having a lower risk appetite than you saw
in the 1990s for example, and particularly among central banks, that is
true," she said.
Cenbank shoppers
Central banks, which own more gold than any other investors,
have turned into net buyers in the last two years - to the tune of over 400
tonnes last year - as economies with large current account surpluses and
foreign exchange reserves reallocate some of that cash.
This shift, together with the lack of incentive for mining
companies to hedge, or lock in a guaranteed future sale price for their gold,
has changed the face of the gold supply landscape in the last decade.
"One difference between now and back then is simply
there are more buyers and fewer sellers, which sounds a bit clichéd,"
Matthew Turner, an analyst at Mitsubishi said.
"But then we had central banks selling and we had mining
companies selling forward, which was almost an exogenous shift in a sense. So
that is probably a swing of about 1 000 tonnes a year. So it's not just
investment. A lot of things have to turn around in a sense for the price to go
down a lot," he said.
Fear cachet
And while talk of recovery does not look to be a huge threat
for gold, economic risk factors still have the ability to fuel prices in the
market's capital protection mode.
Potentially explosive factors are further stings in the
eurozone and a post-election stumble in the United States.
"I still think that not only are we going to get
further defaults from Greece but new defaults elsewhere in the periphery,"
Capital Economics chief economist Julian Jessop said.
"In the environment I'm talking about, where the euro
is breaking apart, the dollar may well be one of the strongest of the paper
currencies but gold will do better than paper currencies of all types. If this
happened, we'd see gold moving over $2 000/oz," he said.
By the same token, the Fed's $2.5 trillion bond-buying
programme is due to expire at the end of June, with some taking that as an
appropriate time for another round of injecting liquidity.
"So if you are looking for the Fed to do something
fresh, probably you would look for the language to shift slightly ahead of FOMC
meetings in the run up to the end of the first half," Credit Suisse
analyst Tom Kendall said.
So what are the odds of a new record high in the price?
Since gold first broke above 1980's then-record $835/oz in
late 2007, it has not gone this long without striking a fresh all-time high
since the doldrums of early 2008 to late 2009, when the world plunged into, and
out of, global financial crisis.
Gold's inability to outshine cash in times of a credit
crunch was well documented at that time, and part of the reason behind its slip
from record highs has been attributed to strains in the lending market in the
latter stages of 2011.
After the credit crunch of late 2008, gold took another 400
days to hit a new record high. It's been 147 days since the last record high,
so a similar recovery period would push a theoretical all-time price high for
gold out to April 2013.