Gold's performance as a diversifier needs more credit - UBS
There remains US and EM based tailwinds that could help gold climb higher, but the risk now is that the patience of gold longs is running thin, UBS argues.
Posted: Monday , 10 Feb 2014
GRONINGEN (MINEWEB) -
Amid the disappointment on display after gold's lacklustre, late-session performance on Friday, the outlook isn't entirely poor for the yellow metal.
In its daily commodities note, UBS points out that, while gold seems stuck in a range at the moment, the metal remains negatively correlated with risk.
It explains that the gold vs S&P 500 20-day rolling correlation is currently at -0.54, after recently reaching -0.63, its lowest level in more than three years.
"This relationship has been gold's best selling point this year," the bank says, "So while the metal has been a difficult trade from a tactical standpoint; strategically it’s performing well as a portfolio diversifier."
That being said, according to the bank, the current trading environment means it is unlikely that gold will run from here because, even in the face of bad data, " the indifference to gold is stubbornly persistent".
" Friday's payrolls highlights that the belief in the US recovery is still very anchored; that the weather effect will wither away up ahead. For gold, that just leaves a frustrated market - the metal needs the risk-on, buy equities, DM growth story to be increasingly challenged if it has designs on higher prices."
According to INTL FC Stone, "Friday's session was rather unusual "in that the complex decoupled from the US equity markets for the first time in a while."
While it suspects that weather had much to do with the sub par jobs number, the poor data weakened the dollar which helped weaken equities and strengthen gold.
"But, it says, "Interestingly, gold prices did not turn lower in line with surging US equity markets and managed to hold on to a modest gain going into the close. We suspect that gold investors were focused more on the likelihood that slowing US economic growth may trigger a “rethink” at the Fed in terms of how aggressively to cut back on its tapering program and therefore were not eager to go short."
Market attention now shifts to the testimony of Fed Chair Janet Yellen. But, UBS says, "The risk for gold is that it bleeds length/support through frustration; frustration that the metal is neither a clear-cut buy nor sell in current conditions."
"Sure, there remains US and EM based tailwinds that could help gold climb higher. But the risk now is that the patience of gold longs is running thin, and would-be buyers observe a metal that can't capitalise on opportunities."