COMMODITIES 5 minutes to read

Is gold no longer a safe haven?

Ole Hansen

Head of Commodity Strategy, Saxo Bank Group

Summary:  Potential gold investors are being left frustrated and sidelined by the yellow metal's lack of momentum despite an escalating trade war, heightened concern about stability in the Middle East, recent stock market gyrations and the decline of bond yields towards an 18-month low.


Last week was another very frustrating week for gold traders. From a bullish perspective the week began on a promising note with stock market weakness and the US-China trade war concerns lifting the price above previous resistance. This situation, combined with the break above $1,300/oz, helped trigger the biggest one-week accumulation of longs by hedge funds since early December. 

According to the latest Commitments of Traders report from the US, CFTC hedge funds bought 46,201 lots during the week to May 14. Having bought another 42,000 lots the previous two weeks the market was once again left vulnerable to any short-term changes in the technical and/or fundamental outlook.

Speculators’ gold positions have been yo-yoing between long and short during the past six weeks. Bullion-backed ETF flows meanwhile have predominantly been negative since February. 
This vulnerability came on display towards the end of the week when a stronger dollar and rising US equities once again reduced the appeal of the yellow metal. Funds, keeping positions on a short leash given recent failures, were quick to reduce longs thereby sending gold straight back towards support and another battle for survival. So far this Monday the price has stabilised ahead of the double bottom at $1,266.5/oz with an escalation of the trade war (read latest updates from John from John Hardy here and Peter Garnry here having sent US stocks back on the defensive ahead of the opening. 

Gold’s lack of momentum despite an escalating trade war, raised concerns about stability in the Middle East, recent stock market gyrations and bond yields near an 18-month low have left potential investors frustrated and sidelined. Last week’s failed attempt only strengthened this hesitancy and while we see no fundamental reason to sell gold the short term direction is likely to be dictated by the potential need from longs to reduce exposure further.
Source: Saxo Bank
The currency market is potentially posing the biggest short-term challenge with the dollar increasingly behaving as the only safe haven at this stage. Not only against G7 but more importantly against the Chinese renminbi where speculation continues to focus on whether the PBoC is going to allow the currency to weaken below $7. Gold’s sell-off between March and July last year coincided with the weakness in CNY as China responded to the opening salvo by the US in the ongoing trade war. 
Renewed weakness in the CNY has so far been acting as another drag on gold but it is our belief that a break above $7 could potentially become gold positive as it would signal a further escalation which in turn may negatively impact stock markets and raise the level of market uncertainty.  On that basis we maintain the view that a gold long against CNH (tradeable offshore renminbi) may offer a better hedge than versus the dollar against a further deterioration in the US-China relations. 

For additional background, check out this article in ZeroHedge quoting Saxo's John Hardy and Christopher Dembik.

Gold’s retracement from $1,300/oz coincided with XAUCNH finding resistance at 9,000. 
Source: Saxo Bank

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