(By Mani) The last couple of days have been interesting for gold, as market saw glimpses of the yellow metal moving on its own accord, as opposed to being dictated by macro developments. However, trading conditions have been light overall, and interest limited as there was hardly any investor appetite to take on big positions, given the upcoming Greek elections.
The lack of clarity as to which way things could turn in Europe would naturally make market players very nervous at this point, particularly after experiencing sharp price swings in gold in the last couple of weeks.
However, gold has managed to claw its way back above $1600 slowly and comfortably find a new home at these heights. The buying pattern has not been aggressive enough to suggest a determined effort to add length, but dips have been bought into easily.
"Initial upward moves over the last couple of days have led to stops getting triggered, giving gold a second wind before it pauses again to establish a new base at higher levels," UBS strategist Edel Tully wrote in a note to clients.
Clearly, gold's sensitivity to US economic data remains very high in as much as weak numbers feed through to higher QE expectations. This remains the most powerful driver for gold at the moment. However, with so much uncertainty hanging over Europe, it is quite possible that the safe haven trade is starting to creep into shape.
There has been decent interest in front-end options this week, with implied volumes considerably higher than actual. This highlights the heightened degree of nervousness in the market at the moment.
"German bund yields have also been rising, behaving more like periphery bonds rather than a safe haven," Tully said.
The spread versus UK gilts – another European sovereign bond that has been considered safer than the periphery – has narrowed substantially this week, with bund yields rising at a faster pace.
Of course, it is too early to make any conclusions about German bonds losing their safe-haven value. In the same way, it is premature to claim the return of gold's safe haven status, with gold still aligning itself more with risk and being unable to perform as a safe haven asset for sustained periods.
"Wherein bonds lose some of their safety appeal would mean investors would be on the lookout for new secure' places to park their money, and given the much-reduced list of alternatives, gold would be one of the top options," Tully noted.
On the physical front though, however, no clear signs have emerged to suggest that the fear-trade has taken off. Buying of coins and other small products has been evident this week, but yet to see a consistent trend before making any firm conclusions about fear-related buying.
Demand out of Europe so far lags in comparison to last year levels, implying that either retail investors are already comfortable with gold positions built last year, or the current Eurozone crisis preventing market players from buying gold.
If things take a turn for the worse this weekend in Greece, it is crucial to monitor the response of European physical demand.
Meanwhile, gold's recovery above $1600 this week suggests has caught a lot of participants off guard, likely forcing shorts to seek cover. Given event risks up ahead, where the outcome could go either way and potentially be extreme, it makes sense that many players would rather be square at this point.