Personal Finance

Why Gold Trade Is Going Gangbusters

The dollar is rising and gold has been gaining too. What's going on? The greenback and gold are usually inversely correlated, so when the dollar goes up, gold goes down and vice versa. But not today—and that highlights the gravity of sovereign debt concerns and worries about the value global currencies, not just the greenback.

Gold| Stock4B | Getty Images


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Gold's gains against currencies other than the U.S. dollar underscore sovereign debt concerns around the world that have been fueling the rally, traders say. Investors and traders are hedging sovereign risk and the debasement of global currencies—not only the dollar—by owning gold. It's not only the looming U.S. debt ceiling deadline or debt problems in the euro zone that are now engulfing Italy. It's a confluence of debt concerns around the world, says trader John Netto, president of M3 Capital: "I believe (the surge in gold) is a direct by-product of sovereign debt in emerging and developed countries."

The gold/euro trade is a "colossal" trade, says Netto, who noted on Friday's Power Lunch that this would be a major focus of commodity traders this week. "It's a reflection of how weak currencies have become versus hard assets and why it is critical to have diversified global portfolio," he said.

Netto and other analysts have noted that gold is poised to continue to rise as major investors, namely endowment and pensions funds, remain underinvested in the precious metal and could fuel further gains. The largest gold exchange traded fund, the SPDR Gold Trust , has risen over 4.5 percent since July 4th.

"The average investor who is buying gold isn't looking at selloff in euro. He's looking at the general dismal picture that he sees in every headline," said George Gero, vice president and precious-metals analyst at RBC Capital Markets. "Everywhere the investor looks he sees a negative headline."

Meanwhile, concerns about euro zone debt, and the U.S. job market and debt-ceiling debate, along with the U.S. dollar's strength, are pushing other commodities lower. Brent and WTI oil futures are down over 1.5%. Copper, platinum and palladium prices  are also lower.

"We have a divergence between gold and the rest of the commodity complex, because the reasons for gold being higher are uncertainty and gold seen as safe haven. Those same concerns are pushing other commodities lower," says HSBC precious-metals analyst Jim Steel. "With a retreat in other commodity prices, it implies there is more to rally in gold than inflation concerns."

Gold may be viewed as a hedge against inflation, as well as deflation. A new report from Oxford Economics and the World Gold Council suggests investors should allocate 5 percent of their portfolio to gold to best offset the effects of both inflation and deflation. The analysis reflects a simple model including gold, cash, equities, bond, and commercial real estate. It goes on to add that the allocation rises in a higher inflation scenario, as well as for risk-averse investors in an environment of even weaker growth and lower inflation.