Until just a few weeks ago, market commentators were taking trades on when (rather than if) gold would reach the psychological $1400 mark. However, the surge in volatility and market maelstrom has raised questions about the broad direction of commodities.
The Bloomberg Commodities Index (BCOM) slumped more than 5% in the space of a fortnight, dragging gold down with it. Volatility’s dramatic resurgence amid nervousness in the equity market is, at least temporarily, outweighing gold’s support from the twelve-month trend of dollar depreciation.
According to traditional market theory, gold is a safe haven. The precious metal is inversely correlated with risk. As investors take risk off the table, gold prices should catch a bid. However, it appears that this correlation has temporarily hit a stumbling block.
Last week was characterised by sharp declines in US stocks, reverberating through global equity markets. Even after a late rally into Friday’s close, the S&P 500 still shed more than 5% in its biggest weekly drop in more than two years. Meanwhile, in another confrontation with traditional market theory, bonds and equities appear to be moving in the same direction. The yield on the ten-year treasury, which is inversely correlated with bond prices, has climbed up to a four-year high. With nervousness in equities sparking risk-off sentiment and bond prices under pressure, gold nonetheless still struggled to move higher. The question is whether the concerns around both asset classes will encourage investors to buy gold.
In this interview, Mark O’Byrne, research director at Goldcore, says the fact that gold did not spike during last week’s equity sell-off was to be expected. He said even at the height of the global financial crisis, amid the collapse in the Wall Street behemoth Lehman Brothers, gold prices fell. O’Byrne says gold’s hedge abilities and safe haven attributes are seen more in the medium to long term. Also, he points out that there was a big move up in December in the gold price, so a period of correction was expected.
O’Byrne says periods of rising interest rates have historically coincided with bull markets for gold. He cites the 1970s, and the period between 2003 and 2007, when gold prices did very well.
In terms of key levels, O’Byrne says there is resistance around $1360 before we head to $1400. He says he is cautious in the short term but feeling constructive for 2018 overall, and says $1500 is quite likely by autumn, although it should end 2018 lower (but still above $1400).