Safe Haven Demand for Gold Remains Intact

January 13th, 2016 by

The precious metals opened in positive territory on Wednesday, although the gold price was mostly flat, lagging behind the other metals. While bullion has fallen this week due to growing risk appetite among traders as the panic in the markets has subsided a bit, the appeal of gold as a safe haven is still a driver for the yellow metal.

At 10 am EST, spot gold hovered around $1,089/oz. The dollar was slightly firmer, trading just shy of 99.2 on the DXY index.

Both silver and platinum rallied by well over 1% in morning trading, while palladium surged better than 4%. This pushed the silver price back up to $14.18/oz (+2.25%) and platinum above $850/oz (+1.44%). Palladium added $20 per ounce, or 4.28%, to trade at $492/oz.

Global Influence

Although a somewhat more stable outlook for China is providing the rationale for a “risk-on” approach in the markets, it’s still been a good start to the year for gold prices. To be sure, several of the main geopolitical risks that have been driving precious metal prices higher are far from being resolved: the global community is still considering how it will handle the intransigent North Korean regime; Saudi Arabia and Iran remain at odds over ideology and dominance in the region; and the volatility in China continues to prompt state intervention in the world’s second-largest economy. These factors mean that the demand for safe havens has not been eliminated by the improvement in risk appetite.

gold_correlationThe chart above demonstrates how gold’s lack of correlation with other major asset classes makes it the ideal hedge in one’s portfolio.

Source: mildchina.com

Source: mildchina.com

Part of the worries regarding China center around how the government has been playing around with the exchange rate of the yuan (renminbi). This seems to fly in the face of the IMF, which recently announced it would be adding the currency to its Special Drawing Rights (SDR) next year on the basis that the yuan’s value was no longer being manipulated. This doesn’t seem to be the case, as even experienced forex traders have been repeatedly surprised by the People’s Bank of China’s direct intervention in the currency market.

The uncertainty of the Chinese economy means that investors have pulled billions of dollars out the country. If not for government rules against certain large firms selling shares, the situation would look even worse. These developments in Asia are certainly generating safe haven flight into gold despite improving investor sentiment in the West.

Wednesday did see some upbeat export data, as December saw exports rise by 2.3% year-on-year, beating expectations. This followed exports falling by 3.7% YOY in November. Nonetheless, the Shanghai Composite lost 2.4% overnight. Virtually all other global stocks were trading in the green on Wednesday morning.

Elsewhere, both crude oil benchmarks rose this morning, looking to notch their first gains in the last 8 trading days—and their first of the 2016 calendar year. Both WTI and Brent crude remained below $32 per barrel, however, and Wednesday’s action is largely seen as a temporary reprieve.

Technical Analysis

The technical outlook for gold is in a consolidation channel, as prices have moved toward re-establishing a steady trading zone in the $1,080s and $1,090s. Gold is testing resistance at $1,088/oz this morning, while the next key level is at $1,092/oz. The 61.8% Fibonacci retracement line is at $1,079, so this is an important support level below $1,083/oz.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.