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Is Gold Decoupling from Crashing Stock and Commodity Markets?

Commodities / Gold & Silver Nov 07, 2008 - 04:38 AM GMT

By: Mark_OByrne

Commodities Gold continues to consolidate between $700/oz and $760/oz and looks set to rechallenge $800/oz in the coming days as safe haven buying reemerges on continuing concerns regarding the global financial system and economy.

Gold was down marginally yesterday (some 1%). It surged after the Bank of England's massive interest rate cut of 150 bps but more counterintuitive trading was seen as gold was aggressively sold by US investment banks on the COMEX who did not appear to want to see gold surging above $760/oz and aggressively defended this position.


All eyes will be on the US non-farm payrolls report which is out at 13:30 GMT. It is expected to be down 200k which could result in equity and commodity markets coming under further pressure.

Equities and Commodities Tumble - Gold Decoupling?
Gold is continuing to decouple from energy, base metal and soft commodities which all fell sharply again yesterday ((WTI $Dec down another $4.53 to $60.77 and the CRB Commodities Index fell another 10.87 to 261.87). Indeed it is notable that commodities and equities are increasingly correlated while gold seems likely to be in the early stages of decoupling from equities and commodities. In recent years, there has been a recurring pattern of gold being correlated with equities in the very short term but to be uncorrelated over the medium and long term (as per Our Performance Table).

With equities and commodities selling off sharply on fears of a sharp and protracted global recession it seems likely that equities and commodities may become more correlated in the short term and possibly even the medium term. Neither have gold's monetary and safe haven qualities and this is why gold is likely to vastly outperform both in the coming months.

Dollar to Come Under Serious Pressure in Coming Months
This is especially the case as the reserve currency of the world is likely to come under serious pressure again in the coming months. The dollar's strength of late has been quite impressive with significant gains against most fiat currencies especially the other major currencies the euro and the pound. But given the terrible and deteriorating fundamental fiscal position of the US and the huge trade and current account deficits and the rapidly deteriorating budget deficits the dollar will again come under pressure once this period of massive global deleveraging is over. Trillions of dollars of US dollar denominated debt had to be paid back in recent weeks in a massive and unprecedented deleveraging of the financial system and this contributed to massive short covering and the significant rally seen in the dollar.

It is worth remembering that the dollar rose sharply in the 4 months after the geopolitical crisis that was the September 11 th tragedy. Thereafter it fell, with intermittent bear market rallies, for the next 7 years. Similarly the global financial crisis has seen a sharp rise in the dollar (from oversold levels) but this is very likely a brief correction in a secular bear market for the dollar.

With central banks slashing interest rates to historically low levels, savers are again being punished and  the opportunity cost of holding gold continues to decrease. Gold's critics use the fact that it does not yield anything as a simplistic criticism of gold. It does not yield anything as it is no one else's liability and is not dependent of the performance of corporations, banks and governments. Thus it has no counter party risk and does not have to offer a yield to compensate for these risks.

Savers internationally are increasingly confronted with negative real interest rates and continuing systemic risk which is likely to rightly lead to increasing diversification into gold.

By Mark O'Byrne, Executive Director

Gold Investments
63 Fitzwilliam Square
Dublin 2
Ireland
Ph +353 1 6325010
Fax  +353 1 6619664
Email info@gold.ie
Web www.gold.ie
Gold and Silver Investments Limited
No. 1 Cornhill
London,
EC3V 3ND
United Kingdom
Ph +44 (0) 207 0604653
Fax +44 (0) 207 8770708
Email info@www.goldassets.co.uk
Web www.goldassets.co.uk

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

Mission Statement
Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

Financial Regulation: Gold & Silver Investments Limited trading as Gold Investments is regulated by the Financial Regulator as a multi-agency intermediary. Our Financial Regulator Reference Number is 39656. Gold Investments is registered in the Companies Registration Office under Company number 377252 . Registered for VAT under number 6397252A . Codes of Conduct are imposed by the Financial Regulator and can be accessed at www.financialregulator.ie or from the Financial Regulator at PO Box 9138, College Green, Dublin 2, Ireland. Property, Commodities and Precious Metals are not regulated by the Financial Regulator

Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Mark O'Byrne Archive

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