Here's why gold prices went nowhere overnight, despite the rush into safe-haven assets

Gold prices are stuck. (Photo by Alex Livesey/Getty Images)
  • There was an unusual lack of demand for gold overnight, despite the fear caused by political instability in Europe.
  • Business Insider spoke to a number of market analysts, who broadly attributed the move to lower bond yields strength in the US dollar.
  • Some analysts also suggested that gold may be losing its lustre as a safe-haven investment.

Italy’s political crisis caused a serious round of market nerves overnight, as money poured out of riskier investments such as stocks.

And it moved back into traditional safe-haven assets, which saw the yield on US 10-year bonds fell back below 2.8% for the first time since April.

There was also demand for the Japanese yen, as the USD/YEN pair fell by almost 1%. But prices for gold — which rounds out the trio of traditional safe-havens — went nowhere.

The precious metal edged higher, but more or less hung around near its recent level at $US1,300 an ounce:

Source: Investing.com

Jordan Eliseo, the chief economist at specialist gold company ABC Bullion, attributed the moves to a stronger US dollar and the recent reversal of bullish trading positions in the gold market.

“You’d typically expect to see a move toward safe haven assets support the yellow metal, especially when equities take a hit, but it’s not playing out that way this time,” Eliseo told Business Insider.

“Renewed concerns re the euro currency, and the subsequent US dollar strength are stronger factors in the market right now.”

That’s served to weigh on gold prices, which historically have moved inversely to the USD.

“The continued unwind of speculative long positions, which have declined almost uninterrupted since late April, is also working against gold,” Eliseo said.

That partly explains the recent fall in gold prices, which have dipped from $US1,358 an ounce on April 11 — a fall of around 4.4%.

“Having said that, gold is still battling it out at around $US1,300 an ounce, and the market looks poised to move decisively in the weeks ahead.”

“If we get a genuine ‘risk off’ event then we could well see gold and the greenback rally together.”

DailyFX senior strategist Ilya Spivak highlighted the fact that gold isn’t a safe haven by itself. Instead, demand for gold is reflective of risk-off trades into other assets — most notably US bonds.

“The rotation away from risk and toward safety naturally increases demand for US treasuries, which drives yields lower. This makes non-interest-bearing assets like gold comparatively more attractive,” Spivak told Business Insider.

Clearly that hasn’t happened this time. But Spivak also explained the historical price moves in gold with reference to changes in the value of US dollars.

“Gold’s other appeal is that of alternative store of value to fiat money — i.e. paper currency backed by nothing physical,” Spivak said.

And the US dollar is the world’s reserve fiat currency, with close to 80% of all transactions globally settled in USD. So gold and the USD often move in opposite directions.

However, Spivak said the US dollar “is a haven in its own right”, due to its liquidity appeal.

“As markets divest of risky assets, they look to cash out into the most liquid currency they can because it can absorb large capital movements without too much volatility.”

The result is that the competing forces of lower bond yields and a stronger US dollar have served to cancel each other out, leaving gold “essentially stuck”.

Commonwealth Bank commodity analyst Vivek Dhar agreed, telling Business Insider that gold prices “are currently caught in a tug of war”.

And when it comes to the competing forces of bond yields and the US dollar on gold markets, Dhar said the USD has recently taken the upper hand.

“The US dollar has demonstrated a stronger influence on gold prices lately, displacing the impact of long term US real yields,” Dhar said — something which wasn’t the case before this year.

CMC Markets chief strategist Michael McCarthy told Business Insider that “a strengthening USD was the main culprit” for gold’s relative inertia.

McCarthy noted that other base metals such as copper, zinc and nickel were hit “much harder” than gold. But he said the price action in gold markets was still “curious”, and suggested that perhaps the precious metal is “losing some of its investment lustre”.

Those sentiments were echoed by AxiTrader’s Greg McKenna, who said the relative lack of demand for gold is part of a broader trend going back to 2016.

“My sense is that it’s lost its place in peoples portfolios as the go to safe haven trade recently,” McKenna told Business Insider.

“Gold has had increasingly less leverage to risk-off events since Brexit back in 2016. And that consistent lack of traction appears to be at play here at the moment.”

McKenna also made reference to bitcoin prices, which climbed off their recent lows overnight amid the broader market turmoil.

Advocates of the cryptocurrency have often touted its use-case as a store of value, like gold.

“It’s interesting to me is that Bitcoin seems to do well in risk off situations these days. It’s as if it’s the anti-establishment hedge,” McKenna said.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.