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Gold enjoyed an incredible first-half of 2016, with the precious metal gaining approximately 25% in the first six-months of the year. The break higher from a falling wedge pattern took years to come to fruition and pointed towards a prolonged period of strength to come.
Gold is an interesting market to trade as it serves few everyday purposes other than jewellery. From a market perspective, it has been traditionally seen as a hedge against inflation, deflation, currency devaluation, alongside geopolitical and macroeconomic risks. Interestingly, the second-half of 2016 has actually provided a significant degree of risk, with the Brexit and Trump votes. However, the price of gold, seemingly didn’t get the memo, falling over 7% in the second-half to date.
Haven or other forces?
The difficulty with gold is that while it has always been perceived as a haven for trading purposes, that label has been waning, leaving many to struggle as to what exactly drives price action. Despite some claims otherwise, it is clear from the graph below that gold has been trading largely based upon its haven status and the market’s attitude to risk. Three of the most commonly heralded ‘safe havens’ are gold, the yen and US treasuries. The correlation is clear to see below, with all three havens turning lower from July peaks. Crucially, we have seen all three sold heavily in the wake of the US election result. Given the gains we have seen in both the US dollar and US stock markets, there is reason to believe we are seeing a risk-off move here.