The Conversation (4)
Gold prices moved up Friday as US bond yields fell. Has the metal regained its safe haven status as some suggest?
Along with the dollar, gold is commonly listed as a safe haven. On Friday, gold rallied as yields on US Treasury bonds fell to historic lows. Gold’s ascent began immediately following a very disappointing US jobs report. Many attributed the rise in gold prices to investors seeking safety in the metal. But was that the case and is gold truly on par with the US dollar as a safe haven?
By the end of the week, the markets were awash with bad news. The Eurozone crisis raged on. Spanish banks were looking increasingly risky and the government’s plan to recapitalize Bankia was shot down. There was an array of weak manufacturing data from major economies, including the EU, UK and China. Reports that unemployment in the EU had risen to 11 percent were followed by news that unemployment had stepped up a notch in the US from 8.1 percent to 8.2 percent, that data for the two previous months has been revised down, and that job creation in May had fallen far short of expectations.
The US jobs data appeared to be the tipping point. Immediately after the release gold prices began to rise.
With the spot price closing at $1,624.10, the metal was up $51.07 for the week ended June 1. This performance came on the heels of May’s decline in gold prices, which marked a four-month drop that Bloomberg called the longest losing run for the metal since 1999.
Following record drops Thursday, yields on US Treasury notes continued declining on Friday as investors raced into US government debt. The benchmark ten-year note fell to a record low of 1.45 percent.
For many, June 1, 2012 was a day that gold successfully traded alongside US Treasuries as a safe haven.
But there are those with other explanations for the events that occurred.
Jeffrey Christian, managing director of CPM Group, is among the camp that suspects technical buying is largely responsible for Friday’s rise in gold prices.
“If you look at the way the market traded early Friday morning, it looks like strong investment demand was encouraged by a couple of large trades that took the gold price up sharply and triggered a lot of buy orders that were standing in the market,” he told Business News Network (BNN).
Then there are those who believe investments in gold surged on expectations of further quantitative easing.
“Confidence in the gold market got a big boost on Friday as the change in U.S. Nonfarm Payrolls jobs number came in at just 69,000, falling far short of the 150,000 expectation, thus increasing the likelihood that the Fed will take steps to stimulate the economy,” wrote Frank Holmes, CEO of US Global Investors, in an investor alert.
“Gold is not a safe haven during economic crisis, or doesn’t function as that currently. You will see gold react somewhat to a crisis, bad headlines or some type of economic downturn. That’s usually driven by speculators buying gold, betting that others will buy gold on the basis of that crisis,” Brien Lundin, president and CEO of Jefferson Financial, said during last week’s presentation, Money, Debt and Gold.
By Monday, the gold market had calmed down and began giving up its gains. Though still low, yields on US Treasuries were also on the rise.
Ultra-low yields and and persistent declines in equity markets have forced some players into gold, says a CME Group market note.
Gold investors are wise to avoid allowing market chatter, and the perception that gold has regained safe haven status, to lead them to false assumptions about the market’s direction.
Last year when gold prices fell from the record high of $1,920 in September many investors weren’t prepared for anything other than a sustained move upward. The resulting shock and burn feelings were comparable to those now surrounding Facebook.
Gold can offer hefty returns. As seen on Friday, the price can rise sharply and quickly, but the metal does not compare to US Treasuries with regard to safety, which is the overwhelming priority in the market right now.
According to Lundin, gold truly reacts only to long-term monetary inflation. He said gold investors understand that the fallout from a credit crisis or the current sovereign debt crises is monetary inflation. Printing money is the solution that central bankers always resort to, and gold reacts much more strongly and consistently to that development.
Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.