After its steep decline from the stratospheric highs reached in September, gold is acting like a risk asset. Traditionally, the metal has an inverse correlation with risk assets. The chart shows that gold fulfilled the role of a safe haven since the global financial crisis, as investors ran away from equities. But, over the past couple of months, it has been moving in tandem with equities.
While it is uncommon, there are precedents as well. “In moments of extreme stress, investors want to liquidate all their assets into cash,” said Nikos Kavalis, a commodity strategist with the Royal Bank of Scotland Plc. Since gold has had a prodigious rise, it is also the most obvious asset category to book profits in, he added.
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That said, traders are divided about the prospects of the yellow metal in the short-term. Yes, the list of troubles in Europe is still growing; the European Central Bank has restarted an easy monetary policy and inflation is pretty high in India and China—prompting gold buying as a hedge against inflation. However, an event like the break-up of the euro zone could force some investors to sell more gold to cover for losses in other assets.