Gold prices have been climbing and the dollar weakening, but that trend may be due for a change, which doesn’t bode well for the precious metal, Barclays Capital analysts say.
The European sovereign crisis will subside and stability could return to the greenback and euro, currencies that rise when gold falls.
In other words, gold has been acting as a hedge against weaker paper currencies, and an end to that trend means investors should buy dollars and sell gold.
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“Investors who are worried about weak, though not disastrous, growth can find hedges fairly straightforwardly, but they might find it much more difficult to hedge really serious economic dysfunction,” Barclays Capital reports, according to CNBC.
“One important set of investors are the sovereign wealth managers, traditional buyers of gold, and another possibility is that gold price moves as a function of their diversification away from U.S. dollar and euro denominated assets.”
While some may argue that a more stable euro could weaken the dollar and bump up gold prices, such a trend would open up market opportunities for the dollar, meaning any rally in gold would be short term.
Gold has shot up against the dollar recently, trading at over $1,540 an ounce as fears that Federal Reserve monetary policy will stay loose coupled with disappointing economic indicators will keep investors away from greenbacks.
“A lot of people are taking their risk off by getting out of the S&P 500 and other riskier assets. There is too much uncertainty with the U.S. currency and the euro,” says Phillip Streible, senior market strategist with Lind Waldock, a unit of futures broker MF Global, according to Reuters.
“So, people think the safest place is the gold market at the moment.”
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