(Kitco News) -Gold’s negative correlation against the U.S. dollar appears to be breaking down as Europeans, in particular, search for safe haven investments, but analysts are mixed as to whether this demand can drive the global gold market higher.
On Monday, gold priced in euro soared through technical resistance at €1,000 an ounce and is currently holding on to those gains, trading around €1,020 an ounce, up more than 1.6% on the day. Colin Cieszynski, senior market analyst at CMC Markets said, describing the move as a “huge breakout” of resistance levels, which has been in place since 2013.
He added that the problems in Europe that are causing the flight to safety are not going to be going away any time soon and this rally has the “technical momentum to move higher.”
Cieszynski said that looking at chart of gold/EUR, there is room for the yellow metal to hit €1,090 an ounce. At the same time, strong European demand could help ignite gold demand in North America, pushing the price to $1,250 or $1,300 in the medium term, he added.
Not only is Europe on the brink of an economic recession and the European Central Bank expanding its balance sheet to stimulate growth, but Greece is once again a threat as speculation rises that it might leave the eurozone, following the results of its Jan. 25 election.
Cieszynski said the question now remains what is going to have more impact on the gold market: the Federal Reserve hiking interest rates to normalize its monetary policy or the ECB expanding its quantitative easing to loosen its monetary policy.
“A lot of tightening in the U.S. has been priced already and I think this year it will be about Europe,” he said.
Ole Hansen, head of commodity strategy at Saxo Bank, agreed that the diverging economies will lead to further dislocations between gold and the U.S. dollar, with both benefiting.
“If you are worried about stocks selling off, Russia and Greece then gold is a good investment,” said Hansen,.
However, he added that gold priced in euros is a complicated investment so it is difficult to say if a stronger gold demand in Europe will be enough to drive global prices.
“There is still plenty of time to worry but we aren’t in the same position as we were in the previous European crisis,” he said. “This crisis doesn’t yet have a life of its own.”
Hansen said that he would expect gold/EUR to hold around €1,050 an ounce.
George Gero, precious metals strategist and vice president at RBC Capital Markets Global Futures, said that so far it looks like most of the safe haven demand is coming from Eastern Europe but it wouldn’t take much to attract Western investors.
“Gold has become noticeable again,” he said. “Until yesterday, you had four safe havens, oil, stocks U.S. dollar and gold. Now you only have two the U.S. dollar and gold.”
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