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Gold Remains A Safe Haven Despite Lower Demand – UBS

(Kitco News) - Gold remains a strong safe-haven asset despite changing dynamics in the marketplace during the last 15 years, said UBS commodity strategist in a recent report.

A good example of gold’s shifting dynamic is its lackluster response to the ongoing uncertainty surrounding Greece’s bailout negotiations. Although the negotiations are progressing no deal has been finalized that the country inches closer to defaulting on a debt payment.

Greek Prime Minister Alexis Tsipras and the group of international creditors were able to agree on some aspects of a funding deal after late-night talks that ended in the early hours Thursday. Although the two sides have been able to agree on budget surpluses there is still a vast divide on issues such as sales taxes and pensions.  At the same time, members of the governing Syriza party have rejected the terms of the deal.

The talks are taking on a new urgency as Greece’s bailout funding official runs out at the end of June, but even before that the country has debt obligations it has to repay. The first of which, €300 million has to be paid to the International Monetary Fund by Friday.

Edel Tully and Joni Teves, the authors of the UBS report, said there are a number of factors why gold hasn’t reacted to the looming Greece crisis and one might be headline fatigue, as last-minute short-term deals have been made, simply pushing the deadlines further down the road. As a result, investors have become complacent to the risks of a Grexit.

“Our colleagues in economics have previously warned of the complacency markets seem to have regarding the situation, for although the UBS base case is that Greece will remain in the eurozone, the risk of an exit is likely to increase as a comprehensive deal remains elusive and as the possibility of a default rises,” they said.

Another factor they say is that economists believe that the European economy is healthier than it was in 2011 and could survive a Greek exit from the eurozone.

Overall, the Swiss-bank strategists said that a new dynamic the gold market faces is that markets have a higher threshold for pain compared to previous years.

“The reality is that financial markets have been through a lot: the global financial crisis, economic recessions, the European sovereign debt crisis, and geopolitical tensions in various regions,” they said. “Considerably more significant changes in the status quo are needed to elicit a reaction from gold.”

Although European uncertainty is not helping to push gold prices higher, Tully and Teves said it is helping to support prices.

Although few investors are currently jumping into gold, more are holding the yellow metal as an insurance policy, they added.

“The reality is that gold holdings have increased over the past decade or so and, even taking into account the cleanout in 2013, the market is still longer than it was in the previous decade,” they said. “Holding gold as an insurance against tail risks suggests that the position tends to remain relatively stable after it is first put on. As gold is accumulated, the propensity to add to holdings on the back of fresh uncertainty and risks naturally diminishes gradually over time.”

UBS currently views investors’ current gold positions as durable, expecting the remaining “strong hands” to help stabilize the marketplace.

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By Neils Christensen of Kitco News;
Follow Neils Christensen @neils_C


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