Gold has bounced back well in the early trading days of 2012. Some have suggested that this sits at odds with the more risk-averse environment of the past couple of days, but from other angles, it does not sit that uncomfortably with other developments. For starters, a fair deal of the weakness in gold seen during December was down to the firmer dollar tone seen during the month, the dollar index being nearly 3% higher. This is notable because gold’s reliance on the dollar for direction (inverse correlation) has been increasing of late, the 40-day correlation at the most negative for just over a year.
Given this, it’s also notable that gold has moved against the firmer dollar tone over the past couple of days. Fundamentally, there are two reasons for this. Firstly, gold has over the longer-term tended to be inversely correlated to global real interest rates. When these are low, the preference to seek returns elsewhere in higher risk assets increases and vice versa. Our measure of global real rates has once again moved into negative territory. The last time it was at these levels, gold was pushing at record highs and the divergence is looking stretched. The second factor supporting the gold price is the seasonal demand from Asia. This tends to happen into the Chinese new-year and there have been reports of increased demand from China especially. This is naturally a more transitory factor, but nevertheless should be keenly watched for signs that gold’s appeal is increasing as an investment class during ever more uncertain economic times. Overall though, the price action we are seeing right now does not look that unusual or out of place.
By
M.Zohaib Gadit
Forex Trading Consultant
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