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March 19, 2009 | By: FP Trading Desk |
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Activity in both gold and gold equities has dominated much of the market interest during the past few quarters. But the recent gains in financial stocks and bullion’s retreat (prior to this week’s Fed-induced surge for gold), demonstrates that investment in gold was clearly a flight to safety.
This epic battle between banks and bullion was perhaps most evident on March 10, when the Dow Jones Industrial Average climbed nearly 400 points after Citigroup (C) told the world that it was profitable in the first two months of 2009. Similar news from JPMorgan (JPM) added to the renewed enthusiasm and speculation that the bottom for the banking sector may have passed.
Bullion and gold equities reacted to the news immediately, with gold falling from $942 per ounce to $891 in two trading sessions, notes Wendell Zerb at Canaccord Adams. The S&P/TSX Global Gold Index fell 9.7%, further supporting the flight-to-safety argument.
The analyst said in a research note:
Clearly, the impression that the financial crisis could be over or trending in some non-doomsday direction had investors and traders exiting their defensive stance.
But is it clear waters ahead for financials and the global economy?
Medium-term concerns that confidence could wane still persist, Mr. Zerb said, citing recent U.S. payroll number that showed unemployment was at its highest level since 1983. Meanwhile, industrial production numbers out of China showed that growth slowed in January and February on exports that fell at a record pace. Japan’s economy shrank at 12.1% annually.
The analyst suggested that confidence will likely return to the market if the various stimulus packages do what is intended for the global economy – stabilize it. This should take more lustre out of gold as a safe haven investment, he added. At the same time, Mr. Zerb warned this could bring inflation concerns to the forefront, which would be good for gold.
He said:
We remain skeptical that the current round of stimulus is a simple solution to right the global economic ship. More likely, we believe that there will be further obstacles as stimulus packages re-inflate the economy.
If that’s the case, then the battle between banks and bullion will rage on.
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