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Gold Rises Again Amid Global Market Tremors

Posts fourth straight day of gains for the new year, rising 1.5% to settle at $1,107.80

By CHRISTIAN BERTHELSEN, ESE ERHERIENE and ALISTAIR MACDONALD
Updated Jan. 7, 2016 2:32 p.m. ET

News link: http://www.wsj.com/articles/gold-prices-rise-on-global-market-geopolitical-turmoil-1452168171

Gold is regaining its luster as the ultimate safe haven for investors.

As global stock markets have come unglued in the first days of 2016 because of worries about weakening economic growth in China and geopolitical unrest over both the Middle East and North Korea, investors have been returning to the market to play defense.

Though gold is traditionally viewed as a risk-off asset, in recent months the $30 billion market has been driven more by anticipation of the Federal Reserve’s interest rate increase and the strength of the U.S. dollar. Investors had pulled back from bullish bets on precious metals in the expectation that a rate increase from the Fed would make metals a less attractive investment compared with such yield-bearing securities as Treasurys.

Financial investors, such as hedge funds, had placed more bearish bets on gold than bullish ones in 2015, for the first time since U.S. regulators began keeping records in 2006. A combination of the expected Fed rate increase, improving global economic signals, rising stock prices and low inflation undermined the case for gold, and prices fell more than 10% last year.

Now, though, the worries rippling through global markets are turning gold into one of the few market bright spots of the new year. Gold prices have gained more than 4% to start the year, hitting their highest level since early November.

On Thursday, gold posted a fourth straight day of gains for the new year, rising 1.5% to settle at $1,107.80 a troy ounce on the Comex division of the New York Mercantile Exchange.

Meanwhile, the major indexes in the U.S., Europe and China are all down in the new year. Through Wednesday, S&P was down 2.6%, Stoxx Europe was down 3% and Shanghai was 5% lower.

“What’s happening to gold is a reflection of how U.S. and global stock markets are doing,” said Jeffrey Nichols, senior economic adviser to Los Angeles bullion dealer Rosland Capital. “The world depended on China in recent years for much of the upward momentum in world equity prices. As we can see in the past few days, that was built on false hopes.”

The gains in gold have come as China’s stock market tumbled on a currency devaluation that raised further questions about the world’s No. 2 economy and fueled concerns over capital flight. Investors have returned to the gold market amid tensions between several Middle Eastern states and Iran after Saudi Arabia’s execution of a Shiite cleric, and worries over North Korea’s announcement that it successfully tested a hydrogen bomb. And minutes of the Fed’s December meeting showed board members remain fearful of raising rates too quickly for fear of undercutting growth have added to the gains.

“We’re now seeing a clear shift back into gold,” said James Steel, chief precious metals analyst at HSBC Securities in New York.

The turmoil could benefit gold in another way, if it slows down the pace of U.S. interest rate rises. U.S. monetary policy dominated trading in gold last year, given higher rates boost the dollar and make this metal less competitive against interest-bearing investments.

“The longer the turmoil in the financial markets continues, the more market participants are likely to have doubts about the Fed rate-hike cycle being continued in the near future,” Commerzbank said in a research note. “We believe this would be positive for gold because the opportunity costs of holding gold would remain low in this scenario.”

Still, some analysts expect the safe-haven boost to be short-lived, pointing out that more recent gains on the flight to safety have been brief. Last year, gains in gold that came out of civil war in Ukraine and the China-induced turmoil in August were shallow and lasted for only days.

“You tend to find geopolitical issues tend to only be short-term drivers or supporters for gold,” said David Wilson, director of metals research and strategy at Citigroup Inc.

Write to Christian Berthelsen at [e-mail], Ese Erheriene [e-mail] and Alistair MacDonald at [e-mail]