Gold prices did not, contrary to many commentators’ expectations, surge on the back of the crisis in Cyprus and its resolution.
But, according to Dundee Wealth Economics‘ Chief Economist, Martin Murenbeeld, there are some positive aspects for gold to be found in the crisis and its resolution, albeit over an extended period of time.
In the first instance, he writes, “with the principle of “deposit risk” having been re-established by the Cyprus crisis, can one accordingly assume that a “deposit” in gold has become – at the margin – more attractive? I think the answer to this question is “yes”!”
Adding that this answer is only likely to be revealed over time through the rising demand for gold storage and vault space, Murenbeeld says another implication of the Cyprus crisis and, indeed, the Eurozone crisis more generally is that there is very little chance of the euro becoming a global reserve currency.
And, with the global pool of triple-A rated government bonds shrinking, Murenbeeld asks, “just what is a prudent Emerging Market central banker to do in a world where liquid, secure, traditional, reserve currency investments are becoming harder to find? My answer is to seek out the original, secure, traditional reserve investment – gold.”
As pointed out earlier, however, these effects are only likely to come into play over an extended period of time. In the meanwhile, Murenbeeld believes that the outlook for the yellow metal doesn’t look good.
The first reason for this is the recent performance of the US. As Murenbeeld says, “The better profile of the US economy, all else constant, is positive for the dollar, positive for investment flows into the US, negative for non-energy US trade balances with the rest of the world (which at this point will not however impede the dollar’s strength appreciably). And because it is positive for the dollar it is not positive for gold.
Unlike the Fed’s however, the ECB’s balance sheet, , has contracted sharply in recent quarters. Which goes against expectations that the ECB would “do what it takes” to ensure the system doesn’t collapse. And, a third reason, says Murenbeeld, is that investors are drawn to equity markets and, thus away from gold.
“These three factors pretty well sum up the gold story to date. Unless something changes – Italy hits the wall and the ECB is finally forced to do what it takes, consumer price inflation in the US begins to surprise, there is unexpected flight from the dollar – the gold price outlook for this year is not strong.”