By Raul de Frutos
Gold is typically considered a safe haven while markets are volatile, and with the recent equity slide both in China and US, investors are thinking of gold as an alternative, safe haven investment.
Indeed, since the start of the year gold prices have received a boost, hitting a 2-month high as global stock markets sold-off.
The Gold-Silver Ratio Spreads
The global stock rout didn't have any bullish effect on silver prices since the precious metal has an industrial metal status, too. That might help explain why gold fared better than silver in January.
Gold (in yellow) versus Silver (gray). MetalMiner analysis of @StockCharts.com data.
Is Gold's Rally Sustainable?
We don't think so. Gold's rally comes after prices hit a six-year low in December so it seems like a normal reaction after an oversold condition. As we can see in the long-term chart below, gold is still in a textbook falling trend.
Gold is simply bouncing off lows. Source: MetalMiner analysis of @StockCharts.com data.
If investors were seriously putting money into gold, we would have prices moving significantly higher by now. The key point here is that the stock market selloff is driven by a slump in commodity prices. Gold is also a commodity and falls along with commodity markets.
Moreover, a strong dollar is also bad news for gold. We expect the dollar to keep strong as interest rates rise domestically and the currencies of commodity-intensive countries keep losing value against the dollar while low commodity prices hurt their economies more significantly.
What This Means For Metal Buyers
We've discussed previously that the gold's safe haven theory doesn't always work, especially under the market environment we have right now. Gold's rally is likely to be short-lived. Although stocks don't look attractive right now, buying gold doesn't look like a much better idea. Cash will probably give better returns than most assets in this first half.