Gold’s cross currency strength signals its rising insurance appeal

Gold’s rally to record highs in euro and sterling terms and the resilience of spot prices in the face of a rising dollar is sign-posting the metal’s broadening insurance appeal, as sovereign debt fears shift to the fore.

Worries over Greece’s fiscal outlook created a perfect storm for euro-priced gold this month, as some investors selling the single currency chose bullion as an alternative.

News that the next UK general election could result in a hung parliament, making it harder for an incoming government to tackle Britain’s debt, sparked a similar rally in sterling gold, taking it to a record 759.86 pounds an ounce.

Investors’ growing sensitivity towards sovereign risk is starting to suggest dollar-denominated gold can maintain strength even as the dollar rises -- usually a prime factor pushing the precious metal down.

“Gold is holding up very well given the foreign exchange market movements, and you have to ask why that is,” said GFMS Chairman Philip Klapwijk. “Sovereign debt is very high up the agenda at the moment.”

Spot gold held above $1,115 an ounce on Wednesday, off the record high of $1,226.10 it hit in December but still above the $1,096.25 at which it started the year.

The dollar has gained nearly four per cent versus the euro in that time, largely on fears over fiscal issues in Portugal, Italy, Ireland, Greece and Spain.

But sovereign debt issues don’t stop there. In January the World Economic Forum said the risk that deteriorating government finances could push economies into full debt crises was the main threat facing the world in 2010.

The US fiscal deficit is projected to reach $1.56 trillion this year, Japanese debt is nearing 200 per cent of GDP, while Fitch Ratings said earlier this week that Britain’s sovereign credit profile has deteriorated.

“Until we start to see governments bringing down debt, the (sovereign) risk will stay with us,” said Saxo Bank senior manager Ole Hansen.

A Reuters monthly poll of 65 forex strategists showed the Greek debt crisis could force euro volatility against the dollar higher still in March.

Usually the euro’s decline versus the dollar would drag gold lower, but that relationship has weakened.

Using 1 as a perfect correlation and -1 as an inverse correlation, the traditionally strong link between gold and the euro-dollar exchange rate fell from 0.9 in early February to as low as -0.2 a month later, according to Reuters data.

With the world’s leading currencies currently involved in what analysts refer to as an ‘ugly competition’, gold is gaining traction.

“People have real fears about what is going to happen in Greece and Spain and the effect it is going to have on the euro, and they are saying the only thing that is safe and secure is gold,” said ANZ Bank’s head of metals sales Peter Hillyard. “Whether that is foolish or not, it is current thinking.”