Gold Regains Allure As Safe Haven From Emerging Markets

This story has been corrected. Chantelle Schieven is an economist with Dundee Capital Markets, not Dundee Precious Metals as originally stated.

Gold has profited from its reputation as a safe haven from turmoil in emerging markets and elsewhere early this year, particularly as tension over Ukraine and the Crimea region continues.

Prices have risen from about $1,200 per ounce on Jan. 1 to about $1,300 per ounce on Thursday, touching highs of $1,382 per ounce earlier in March as Russia advanced on Ukraine.

Geopolitical risk is a theme that will drive gold prices this year, said Dundee Capital Markets (TSE:DPM) economist Chantelle Schieven at a New York gold seminar on Tuesday. Dundee Precious Metals is a Canada-based investment bank.

“Geopolitical risk – we actually feel like that is still fairly high this year, and there gold prices tend to do best,” said Schieven. Gold prices often jump 3 percent to 10 percent after a major risk, said Schieven, citing a $25-per-ounce jump after the 9/11 bombings in 2001 and a $70 uptick after the invasion of Iraq.

“Granted, after the risk, you do see the gold price come down some,” she continued. Tensions between China and Japan over control of the Senkaku islands could also come to a head in the next two years, added Schieven, underlining that tension as an event on the horizon.

Spot gold has risen 8.5 percent so far this year, recovering after a poor 2013 where it fared as one of the year’s worst-performing assets. Gold fell 28 percent last year in its worst year since 1981, on rising equity markets and fears over U.S. interest rate hikes.

Countries like Venezuela, Argentina, Thailand and Turkey were also politically and economically volatile early in 2014, though gold didn’t react as significantly to those concerns. Foreign investors withdrew capital from emerging markets last year and early this year, as fears over Federal Reserve tapering hit currencies like India’s rupee and Brazil’s real last summer.

Gold helps investors hedge against foreign exchange volatility, found a report by gold industry lobby the World Gold Council early this week. Gold is more liquid relative to emerging-market currency exchange markets, though it’s less traded than the U.S. dollar paired with the British pound, the euro, or the Japanese yen. A strong U.S. dollar often weakens gold prices, however.

“When there is heightened uncertainty in the system, gold is seen as a store of value,” said World Gold Council investment research director Juan Carlos Artigas to IBTimes. “It’s used to create some perspective of safety among investors.”

The report found that gold can reduce losses from foreign exchange volatility, at cheap costs. “Gold has garnered a greater response in crises impacting more than one market,” the report concluded.

Nonetheless, gold fell 6.8 percent this month, noted UBS analyst Joni Teves in a Thursday note, descending by $90. There hasn’t been a rush of buying lately at $1,300/oz., she said.

Even with heightened interest in gold from retail and institutional investors over the past decade, gold still accounts for less than 1 percent of global financial assets and has remained a tiny slice of global assets for years, according to commodities researcher and asset manager CPM Group.