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Precious metals back in favor as volatility rises

In the recent round of market turmoil, the price of gold price has struggled to shrug off its correlation with the U.S. dollar, but as bond and equity volatility persist, investors' are eyeing up its safe-haven potential once again

Stronger-than-anticipated jobs numbers out of the U.S. and rising government bond yields weighed on the gold price last week, but as Greece worries refuse to go away and other asset classes are offering little protection, investors are taking a second look at gold and other precious metals.

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An employee arranges one-kilogram gold bars for a photograph at a Tanaka Kikinzoku Kogyo K.K. store in Tokyo
Bloomberg via Getty Images
An employee arranges one-kilogram gold bars for a photograph at a Tanaka Kikinzoku Kogyo K.K. store in Tokyo

Gold and silver prices have moved between gains and losses this week, as the 10-year German government bond yield broke through the significant 1 percent barrier for the first time since September 2014.

While gold's upside has so far been capped by the gains seen in the U.S. dollar -- a stronger greenback tends to push bullion prices down -- the outlook for the rest of year is positive, according to analysts.

"It would be wrong to conclude that the outlook for the gold market over the remainder of 2015 and beyond depends solely on the evolution of U.S. monetary policy, and that Fed tightening can only mean lower prices," said head of commodities research at Capital economics, Julian Jessop.

"What's more, even over briefer periods, safe-haven demand and buying from key emerging markets can more than offset headwinds from developments in the U.S.," he added.

Gold

Demand for gold could also increase as an inflation hedge when the Federal Reserve raises rates as a result of inflation picking up, Jessop said.

Another factor for the metal is global central bank buying, led by Russia. The Russian central bank has been bulking up its gold supply in an effort to diversify away from U.S. dollar holdings, which will also likely support the price of bullion this year, according to analysts at the group.

Read MoreRussia wants more gold—here's why

Inflows into gold exchange traded products, or securities that track an index or asset, have also ticked higher in the last week according to data from ETF Securities.

Last week there was a $5 million net inflow into long gold ETPs as well as around $10 million out of short gold ETPs, or products used to predict a fall in the price of gold.

"Gold is still viewed as a very defensive safe haven asset, but I guess at the margin, that U.S. dollar strength has limited any upside," said director of research at ETF Securities, Martin Arnold.

"In the last week, we have started to see more inflows into gold, modest inflows, but that's generally how it starts. We did see more optimistic positioning in terms of the flows, people taking their shorts off and adding to longs," Arnold said, who sees gold trading up from current levels of around $1,180 to $1,300 by the end of the year.

Platinum

Meanwhile, with few of its own price triggers, platinum has lagged the gold price for most of this year.

Prices in the precious metal have recently broken the $1,100 psychological barrier and risk sliding further the longer it stays under that price, according to UBS strategist Edel Tully.

"In reality, the recent weakness probably has little to do with platinum itself. The market is very sentiment-driven right now. And given platinum's lack of internal catalysts to drive its own price action in the near-term, it is instead looking to gold for direction," Tully said.

"We don't think platinum deserves to trade below gold for a sustained period. That nearly everyone is bearish platinum right now should be a warning in itself that we may be nearing an inflection point," she added.

Silver

Silver saw sharp gains in May and was the best performing precious metal last month, with silver net longs jumping by 138 percent in May according to Capital Economics, as Chinese demand for the metal has remained robust.

Silver is currently trading under $16 per ounce, down from last month's highs, but Arnold sees it hitting around $18.50 by the end of the year.

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"There are better opportunities in those cyclically exposed precious metals than gold," he said.

"Buoyance in China is more beneficial for the cyclical precious metals such as silver and platinum and that sort of rising demand is going to be more beneficial," he added.