HardAssetsInvestor

Written by Sumit Roy  |

November 15, 2011

Precious Metals Monitor: Gold-Stock Correlation Will Remain Strong

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Will gold regain its safe-haven status anytime soon?

This past week was a relatively uneventful one for precious metals prices, but not for news flow in financial markets, which remains fast-paced. The European sovereign debt crisis continues to drag on, while economic growth outside of the continent continues briskly.

These opposing forces have kept risk-asset prices relatively stable, which is an ideal environment for gold. The backdrop of sovereign debt concerns and calm financial markets (outside of the eurozone bond markets) has translated into steady investment inflows into the yellow metal.

Moreover, strong global growth means that demand from emerging markets such as China and India —the two largest consumers of the metal — remains firm.

But after rallying significantly from close to $1600 ($1532 using September’s intraday low) to $1800 in the span of several weeks, gold prices have paused. Last week we suggested that investors should not accumulate positions near the $1800 level. We argued that the deteriorating situation in Europe could potentially lead to a financial shock on the continent that would have major global ramifications. Such a scenario would lead to panic selling across risk assets, gold included.

Despite the potential for this dire scenario, so far, investors are unfazed. The S&P 500 is holding up relatively well, with the stock index well above the lows of September and October. Granted, the outlook for the U.S. economy has improved since then, but the outlook for Europe has deteriorated.

Representing about a quarter of the global economy, Europe is not insignificant, though it is not a major driver of global growth (emerging markets are the biggest driver of growth). Even a recession in Europe would not necessarily derail global growth per se. Rather, the risk lies in a financial shock, and that is the possibility the continent and world faces right now.

Italian interest rates remain near euro-era record levels above 7 percent. In a negative twist, this week Spanish rates begin to climb significantly as well, surpassing 6.3 percent.