As the spotlight is thrown back on the euro zone crisis amid a political stalemate in Italy, investors are scrambling for beaten-down safe havens, scooping up gold and the yen which have fallen sharply in recent months.
The traditional safe haven assets saw a broad rally during Monday's New York session. The yen strengthened more than two percent against the dollar, changing hands at 90.85 at one point, while gold prices added one percent, and extended the gains in Tuesday's Asia session to $1,598 per ounce, or a gain of 2.5 percent from lows hit earlier this month.
(Read More: Gold Ends Below $1,587 Amid Italy Election Drama)
According to Andrew Su, CEO at Australian brokerage Compass Global Markets, gold's safe haven status is back.
"Over the past year, gold has only moved in reaction to expectation of quantitative easing, but historically it has reacted to everything from conflict, political turmoil and falling share markets," Su said. "Only this week it has started to rally on the back of negative developments out of Europe. We see gold's safe haven status coming back to the fore."
Italian elections at the weekend left no party in the majority, stoking concerns a political deadlock could threaten the country's economic reforms. The outcome triggered a selloff in the global markets. The S&P 500 fell 1.83 percent on Monday, while Tokyo's Nikkei was down more than 2 percent Tuesday, and European shares are set for a sharp decline after Monday's hefty losses. The VIX index - a broad measure of volatility in markets, has spiked some 58 percent over the past week.
(Read More: Global Markets Fear Italian Hung Parliament)
The political stalemate has become the latest market risk, adding to the increasing jitters surrounding the U.S. government's spending cuts, which will kick off on March 1.
According to Su, these two events mean further upside to bullion, which he predicts could rally over the course of the year.
"If gold stays above the important technical level of $1,530 over the next few weeks then it could go to $1,900 over the next few quarters," he said.
Gold has been steadily falling from a peak of just under $1,800 in October last year, after regulatory filings showed major gold investors, including George Soros, were selling out of the precious metal in the final quarter of 2012 over fears of a bubble.
(Read More: George Soros, Pimco Turned Bearish on Gold)
But Tony Farnham, economist at Paterson's Australian Stockbrokers, said the recent gold rally will be short-lived due to the absence of the real fundamental drivers of a rally in the precious metal.
"Yes it's true that when volatility increases people always look to gold. But the strong U.S. dollar is cramping the ability for investors to buy it at the moment," he said.
The resurgence in the yen overnight is also evidence of investors fleeing for safety, Su said. The currency has weakened some 12 percent against the U.S. dollar this year, beaten down by Japan's radical reflationary policies to kick start the economy, making it the world's worst performing major currency.
But investor panic over the contagion impact of the revived euro zone crisis and the upcoming U.S. spending cuts could bring back appetite for the currency.
"The yen is another safe haven trade that has proved popular over the past few days," said Compass Global Markets' Su.
"Our scenario is that as Europe and U.S. economies worsen, and as the tensions between China and Japan over the East China islands resurface - this will prompt a rapid fall in the dollar/yen below 90 to 85. Investors have been fooled by the influence of the Bank of Japan (BOJ). Every major intervention in the past couple of years by the BOJ to weaken the yen has eventually failed as global factors dominate," he added.