Research: Gold Acts As A Safe Haven Against USD And GBP

Today’s AM fix was USD 1,374.50, EUR 1,028.59 and GBP 880.30 per ounce. 
Yesterday’s AM fix was USD 1,370.50, EUR 1,027.28 and GBP 879.60 per ounce.

Gold climbed $7.20 or 0.53% yesterday, closing at $1,374.60/oz. Silver rose $0.13 or 0.57%, closing at $23.05. Platinum surged $29.34 or 1.9% to $1,535.74/oz, while palladium climbed $10.85 or 1.5% to $752.35/oz. 

Gold is flat on the week after a near 5% gain last week. Gold is well bid in Asia with volumes and premiums remaining robust which will support prices.  As will continuing futures backwardation and the fact that gold borrowing costs remain in backwardation at near Lehman Brothers lows.

In China, the volume for Shanghai’s benchmark spot contract climbed to the highest in almost three weeks. Volumes for gold of 99.99% purity jumped to 14,872 kilograms yesterday, the highest since August 2nd, according to data from the Shanghai Gold Exchange.


Gold Prices/ Fixes/ Rates / Volumes – (Bloomberg)

Premiums on the Shanghai Gold Exchange fell to $16 per ounce (0800 GMT) over London spot but remained healthy showing robust physical demand in China (see table above). 

Demand from the over 2.3 billion people, rich and poor,  in China and India alone in just 2013 is set to be 1,000 metric tonnes which is worth over $87 billion. It is important to juxtapose this with the $85 billion that the Federal Reserve is printing every single month.

Gold holdings in the SPDR, the biggest exchange-traded product held steady and appear to be stabilising.

Silver continues to consolidate at $23/oz. It has entered a bull market leading to increased demand for the precious metal as an alternative investment. Silver is more than 25% higher from its June low of $18.23, placing it firmly in bull-market territory—defined as a roughly 20% rise off a recent low.

The risk of a Black Swan event leading to a stock market crash was seen again yesterday after a faulty connection between  two of the biggest operators of U.S. stock exchanges brought half of the world’s largest equity market to a standstill. This is the second time this week U.S. trading was shaken by a computer malfunction.

Connectivity was disrupted between NYSE Arca and the data processing subsidiary of the Nasdaq, where some 2,150 U.S. companies trade. That led Nasdaq to freeze thousands of stocks, from Apple to Facebook and led to a complete shutdown for three hours.

Dennis Gartman’s announcement that he is buying gold once more has again resulted in much publicity.


Gold in USD, 1 Year – (GoldCore)

As recently as August 7th Gartman warned that the “panic stage of gold selling” may be “just ahead” and said that “only gold bugs still believe in a rally”. Gold reached its lowest point in August on that day, August 7th, at $1,273/oz and has risen $100 or 8% since then.

In July, Gartman wrote in what he called a “watershed commentary” that gold was going to go “several hundred dollars higher."

Gartman would save his clients a fortune in trading costs and missed price appreciation if he advised them to adopt a buy and hold, physical for long term strategy. This is the course being followed by the smart money internationally including hedge fund managers such as Kyle Bass and David Einhorn.

A recent World Gold Council survey found that most family offices investing in gold today employed a strategic asset allocation framework and nearly 50% had a specific allocation to gold. Of those offices with a gold allocation, over one third plan to increase this allocation.

Gold is off almost 20% year to date, but has  risen 16% from a 34-month low of $1,180.71/oz on June 28 as lower prices and concerns about macroeconomic and monetary risk led to physical gold demand throughout the world.

The somewhat silly debate as to whether gold is a safe haven or not, or a bubble or not, will be seen for what it is in the coming years and people, experts and sections of the media will ask how could we have gotten gold so wrong.

Many notables such as Paul Krugman, Nouriel Roubini and Warren Buffett have in recent months suggested gold is a ‘barbaric relic’, is a bubble and is not a safe haven, and have dissuaded investors and savers from diversifying some of their wealth into gold.

They will soon be shown to have misled investors and savers and will lose credibility. People in India, Cyprus, South Africa, in the Middle East and Africa and much of the Eurozone who owned gold have been protected from recent financial, economic and geopolitical dislocations. Thus, proving the simplistic anti-gold thesis badly wrong. 

We will likely see some furious back pedalling and claims that "nobody saw this coming" when indeed there have been many financial and economic analysts warning about exactly these risks for years.

Rather than sitting nervously and passively and awaiting the coming financial dislocations and expropriations – investors and savers need to be prepared for the uncertain financial scenarios that seem increasingly likely.

Opinions and extreme anti-gold opinions tend to get much media coverage but it is important to always focus on real people and families and their experience of owning gold – both in recent years and in history.

It is also very important to look at the facts, the figures and the academic research.

One of the most published academics on gold in the world is Dr Brian Lucey of Trinity College Dublin (TCD) and he and another academic who has frequently covered the gold market, Dr Constantin Gurdgiev have just this week had an excellent research paper on gold published.

They have researched the gold market, along with Dr Cetin Ciner of the University of North Carolina and their paper,  ‘Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates’ finds that gold is a hedge against US dollar and British pound risk due to “its monetary asset role.”

Abstract
In this paper we investigate the return relations between major asset classes using data from both the US and the UK. Our first objective is to examine time variation in conditional correlations to determine when these variables act as a hedge against each other. Secondly, we provide evidence on whether the dependencies between the asset classes differ during extreme price movements by using quantile regressions. This analysis provides evidence on whether these asset classes can be considered as safe havens for each other. A noteworthy finding of our study is that gold can be regarded as a safe haven against exchange rates in both countries, highlighting its monetary asset role.

Highlights
> We determine pairwise hedging properties of various major asset classes. 
> We analyze if the dependencies between the assets differ in extreme price movements. 
> We determine whether asset classes can be considered as safe havens for each other. 
>We find that gold acts as a safe haven against the USD and GBP exchange rates.


Dr Brian Lucey and Dr Constantin Gurdgiev of Trinity College

Dr Gurdgiev has engaged in much evidence based academic research on gold and found that gold is a "hedging instrument and a safe haven" and presented his findings to the World Bank, ECB and BIS more than two years ago.

Dr Lucey has consistently pointed out how physical gold is financial insurance or a hedge against political uncertainty.

Both have advocated an allocation to physical gold in a portfolio and accumulation through dollar, pound or euro cost averaging. 

Conclusion
Actual real world experience, evidence and academic research on the gold market are frequently ignored in favour of the simplistic and often the misleading.

This will change in the coming years when there is a realisation as to the importance of gold as a diversification and as a means of preserving wealth.

Those who continue to focus on gold’s academically and historically proven safe haven qualities as an important diversification will again be rewarded in the coming months.

NEWS
Gold Swings as Investors Weigh Stimulus Against Increased Demand – Bloomberg

Gold futures rise but dollar, Treasurys weigh – MarketWatch

Gold’s Rout Spurs Surge in Indonesian Demand – Bloomberg

Gold Bears Take Over as Fed Members Back Taper Plan – Bloomberg

COMMENTARY
Crash Alert – Conditions Are Ripe For A Storm – MoneyWeek

Extricating Yourself From The Economy – Max Keiser

The Line Every Gold Trader Is Watching – Zero Hedge

A Warning Regarding Broken Speculative Peaks – Hussman Funds

Mark O'Byrne

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