Gold As A Safe-Haven: Gone Forever Or Just On Hiatus?
Published on Monday, 20 February 2012 21:19 Written by Todd Shriber
New York, February 20th (TradersHuddle.com) – For as long as many investors can remember, and arguably since gold was first used as currency thousands of years ago, the yellow metal has been viewed as a safe-haven investment. Gold has been the traditional inflation hedge, the place to turn when major currencies such as the U.S. dollar become debased and an ideal place to avoid intimate correlations to equity prices. All of those scenarios have been true at various points in history, but things have been a bit different in 2012.
On an anecdotal basis, there has been plenty of trading days this when gold (and the other precious metals) have moved in tandem with the tenor of the news flow from Europe. Simply put, if there has been bad news pertaining to Greece and the other PIIGS on a particular day, there has been an above average chance gold has moved lower that same day. Conversely, if the news has been good out of Europe, there has also been an above average chance that gold has moved higher that day.\
Don’t believe it? Well, the statistics indicate gold and Europe have been linked at the hip in 2012. Using exchange-traded funds as our guide, the SPDR Gold Shares (NYSE: GLD), the world’s largest ETF backed by physical gold, is up 10.33% year-to-date. Guess how much the Vanguard MSCI Europe ETF (NYSE: VGK) is up? Just over 10.6%.
On the other hand, the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) is down 25.2% year-to-date, indicating a near perfect negative two-to-one negative correlation among market volatility and fear and gold. Said differently, to this point in 2012, gold has been viewed as risk asset, a view normally reserved for stock, oil and currencies such as the euro.
Of course, gold’s ascent to risk asset status has been fueled by Europe and lingering doubts regarding European policymakers’ ability to craft a substantive solution to the continent’s sovereign debt crisis. From the Dubai Chronicle: However, gold became more of a risk asset rather than a safe haven lately, as the drawn-out discussions with Greece continue. It is now more vulnerable to price swings. The eventual settlement of the eurozone sovereign debt crisis should eventually change the precious metals price direction. Until then, gold trading is likely to be volatile and prone to follow the eurozone news.
Gold ties to Europe do not necessarily imply a crowded trade. The gold trade has been deemed "crowded" for several years and it may be crowded, but gold keeps going higher. However, at this point, gold’s trade might be jeopardized less by being crowded and more by continued correlations to Europe’s news flow.
Significant to everyday investors is the fact that gold will always have its naysayers. Legendary value investor Warren Buffett is one of gold’s most vocal critics today. On the other hand, hedge fund legends like John Paulson and George Soros love gold. For now, gold and Europe are joined at the hip. Hopefully for gold bugs, that will change sooner than later. After all, gold has shown itself to be more trustworthy than any central bank or group of politicians in the world.
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