Gold faces further pressure, says Barclays Wealth

The gold price could drop yet further, after recently fulfilling its reputation of rising like an escalator then falling like an elevator, according to Barclays Wealth.

The timely warning that gold is not always a safe haven, made by DWS Investment’s co-head of multi-asset Christian Hille in the latest edition of Investment Europe, is echoed in research published on 30 September by Barclays Wealth.

Its head of global investment strategy Kevin Gardiner noted the correlation of commodities generally has increased “substantially” in the prevailing risk-off environment.

“The plunge in risk assets was accompanied by a significant drop in gold prices, despite its traditional ‘go-to’ element in times of financial market panic.” Over the preceeding two weeks, Gardiner noted the 10-day correlation of gold to equities had turned positive.

“Many market participants have said gold will be like going ‘up on an escalator then down in an elevator’ and indeed, looking at gold last week it seems that saying has been fulfilled. Gold is not a one-way bet.”

It dropped 15% after Lehman Brothers’ collapse in late 2008, for example.

By 29 September 2011 gold spot price fell 6.7% week on week, 11.6% for the month and 13.9% for the year.

Gardiner noted that recently the volatility of gold also increased significantly and “the lack of other safe-haven assets has, perversely, also contributed to this volatility.

“The most important attribute to gold is its perceived status as a store of value in the long term, and for that reason prices tend to benefit during times of moderate volatility. However, when financial market volatility is intense, gold is not immune.”

The 10-day volatility of bullion prices recently hit levels not seen since early 2009, and matched or exceeded by only five volatility peaks over the preceding decade.

Gardiner said gold prices decline as equity markets start correcting, because participants such as hedge funds unwind positions, or cash out to cover losses.

He added pressure on bullion increased recently due to repeated rises in margin requirements for precious metal trading, particularly at the Chicago Mercantile Exchange group since late 2010, to “reduce speculative bets, to try to curb potential price volatility.

“Looking ahead further hikes in margin requirements could pose further downside risks to gold,” he said.

Gardiner noted the initial requirement to open a gold position was increased by 21% per contract to $11,475 this month, bringing the margin to be worth about 7% of the value of the trade, where each contract is worth about 100 troy ounces.

The corresponding increase for silver trading cash deposits increased by 16% to $24,975 per contract – or about 18% of the trade’s value.

Gardiner cautioned gold could also suffer if the eurozone’s crisis worsens significantly and quickly.

“Gold prices may well suffer alongside all other ‘risky’ asset classes as investors pile into cash. However, we continue to expect a ‘muddle through’ scenario in which case investment demand and hence market sentiment will likely remain supportive. Heightened financial market volatility and ongoing macroeconomic pessimism coupled with a prolonged period of low interest rates are all factors likely to underpin demand for gold in the year ahead”.

Barclays Wealth foresees gold spot per ounce being $1,875 on average this quarter, to average $1,930 in the first quarter of 2012, but $1,400 by 2015.


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