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Gold Prices: Too Volatile for a "Safe Haven"?

Volatility means gold may have lost its "safe haven" tag – but Gold Prices could still have some upside left...

NEWSPAPER HEADLINES are often quick to link any upward rise in Gold Prices to safe haven buying, writes Geoff Candy at MineWeb.

And, while traditionally, gold has been viewed as a store of value in uncertain times, the recent volatility in Gold Prices has some analysts asking whether or not this moniker is still really valid.

French bank Natixis, in its latest Commodities Weekly report says, "In September, we suggested that gold had lost its safe heaven status, in large part due to its high implied and realized price volatility. For us, it was unreasonable for an asset with such high price volatility to be considered a risk-free investment."

During September, the bank points out, markets switched their favor to the Dollar as its preferred safe haven during the collapse -a preference that it has maintained throughout October "both as the Dollar fell back in anticipation of a European breakthrough, and as the Dollar has more recently rallied in response to market disappointment".

Since then, it writes, the correlation between Gold Prices and other commodities has risen and the correlation between commodities and the Dollar has fallen.

"This change in perception has been well illustrated by a subtle shift in the rhetoric used by many gold bulls, favoring being long Euro-gold or sterling-gold rather than just being long gold."

For Natixis, investment flows are the key driver behind this change. Between the end of 2008 and the end of the first quarter of 2011, it says, the level of exposure to the commodities sector remained fairly steady with investment switching between gold and other, "more productive commodities" depending on the prevailing macroeconomic view.

But, "Since April 2011, however, withdrawals from commodities as an asset class have accelerated, impacting upon precious metals as well as other sectors within the commodities spectrum. This can be seen in holdings of ETFs and other commodity funds, while outflows from broader index investors have accelerated particularly sharply in August and September, as shown by CFTC index investment data," the Bank says.

This is further supported by the fact that US gold mint sales fell to their second lowest level since June 2008 in October.

Given the current macroeconomic turmoil continuing to engulf the world, Natixis does not believe that this is indicative of an end to the gold bull market especially because Gold Prices have remained well supported, despite this loss of safe-haven buying, by continued strong demand from Chinese and Indian investors and emerging market central banks.

"It is perhaps still premature to suggest that gold's bull market is over. There also remains the scope for further doses of quantitative easing from the world's major central banks. Nevertheless, it is acutely noticeable that gold is no longer being seen as the safe-haven risk-free asset that it was perceived to be for much of the last few years."

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Founded in 1999 as part of the Johannesburg-listed MoneyWeb media group, Mineweb is one of the world's leading sources of mining and metals-investment news, comment and analysis. Managed since 2003 by professional mining engineer Lawrence Williams – formerly of Mining Journal, and with more than 30 years' technical and financial experience in the sector – MineWeb provides thorough, international coverage of the natural resources industry.

See all MineWeb articles.

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