Other commodities entangling gold

The ever-increasing volatility in the gold spot and future prices has undoubtedly changed the status of gold from a safe haven to a relatively volatile asset. As analysts throughout the world change their views on gold; investors are becoming more cautious with regards to fresh positions in the precious metal for investment purposes. Rising volatility in gold prices has been largely attributable to heightened activity in the yellow metal by large funds and governments alike. However, individual investors have also stepped up the frequency of their trades and holding periods are falling. Summarily, the dynamics of the bullion market are changing at lightning pace. Unprecedented levels of uncertainty in the eurozone have added fuel to fire. The turmoil in Italy, Germany, Greece and other advanced economies has not only had a huge psychological impact on investors but also created an indirect liquidity-based effect on the demand and pricing of gold, base metals and other commodities. The direct effect is simple as the uncertainty about the eurozone crisis encourages investors to go long on gold; considering it a relatively safer store of wealth. According to an estimate, the demand for gold increased by 6 percent in 3QCY11 backed by demand from Europe, reflecting the risk-averse psyche of investors. Demand for base metals is expected to remain stymied in coming months on the back of the continuing economic slowdown in advanced economies. Consequently, gold has also witnessed selling as cash-strapped investors liquidate their holdings of the precious metal to cover positions in other areas. The recent sell off of gold in New York to cover losses in other commodities which pulled down the gold prices by 1.5 percent is the best example of this phenomenon. The direct and indirect effects are exerting opposing forces on gold prices and hence increasing the volatility of the precious metal. However, despite this volatility economists are ruling out chances of a big decline as they are fixated with structural changes such as policy changes made by central banks with regard to the accumulation of gold in reserves and monetary easing. Hence, gold which was once considered to have a very loose link with other commodities and equities is also now entangled with them. Therefore, as eurozone economic developments take centre stage, the bullion market will also be riveted by developments there.