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Gold price surge: the fear trade is back

Gold price: the fear trade is back

Seeing red

Gold enjoyed a second day of solid gains on Tuesday as fears of new eurozone crisis and a fresh slide in the price of oil saw investors seeking safe haven assets.

In late afternoon trade on the Comex division of the New York Mercantile Exchange gold for February delivery was changing hands for $1,218.40 an ounce, up $14.40 or 1.2% from Monday’s close.

Just before noon a series of huge trades saw the metal reach a day peak of $1,223.30, the highest since December 15. Overall volumes traded also picked up with 176,000 lots or 17.6 million ounces traded, more than double the daily average over the holiday period.

The Dow Jones recovered towards the end of the day after another nearly 300 point drop for the blue-chip index, while the broader S&P500 slid beneath 2,000 points in lunchtime trade, down 4.5% from record highs reached at the end of last year. The Nasdaq’s decline was the fifth straight day of losses.

After appearing to stabilize last week crude oil on Tuesday hit fresh lows with US benchmark West Texas Intermediate briefly dipping as low as $47.55 a barrel. Oil has lost 9.8% of its value since the start of the year after sliding 46% in 2014.

Gold was finding favour among investors seeking a safe haven as worries mount about the break-up of the Eurozone and default on debts by member Greece, the crude oil rout and its impact particularly on Russia, and the rampant dollar sparking an emerging market currency crisis.

While Greece and Russia account for a only small portion of global GDP, a collapse in either country could nevertheless send the world economy into a tailspin.

The rouble has fallen 70% against the greenback since the end of June and Russian corporations have to repay bonds worth $98 billion this year.

Greece’s government debt totals $479 billion and the tiny European nation is struggling to repay annual interest payments of $35 billion. On January 25 Greece will vote on whether to keep using the euro currency or devalue its debts and return to the drachma.

Last year emerging markets issued nearly $280 billion in US denominated debt and falling currencies are making servicing total debts of more than $1 trillion increasingly difficult.

On Monday, the US dollar hit the highest level since November 2005 against the currencies of major US trading partners. The US currency has strengthened more than 13% over the past year.

Gold and the dollar usually move in opposite directions, but gold has shown remarkable strength in recent months.

After the turmoil of the 2008-2009 global financial, the price of gold and the value of dollar began to form a close inverted correlation. Since the second half of last year they began diverging.

Plotted against the greenback on the basis of the past correlation between the two, the price of gold may now be expected to be trading below $1,000 as this graph from Capital Economics suggests:

Gold price: the fear trade is back

Source: Capital Economics

Image of traders at Sao Paulo stock exchange by Rafael Matsunaga