New York - A disconnect is occurring between gold and other commodities as investors keep piling into the precious metal as a safe haven but are cool toward industrial commodities that are bogged down by the soft economy and a strengthening U.S. dollar.
Most commodities haven't been able to grab onto the coattails of gold, with the exception of some such as silver and platinum that have roles as both precious and industrial metals.
"Precious metals are not only the best performing commodity sector by a substantial margin, but also the best performing asset overall, with stocks and property down sharply year-to-date and government bonds and hedge funds making only marginal gains," a Barclays Capital research report says.
The Continuous Commodity Index is currently at 345.52, up from the December bottom of 322.53 but well below the July peak of 615.04. Meanwhile, most-active April gold futures have risen more than $200 this year to touch $1,007.70 Friday, within striking distance of the front-month $1,014.60 record high set in March 2008. Prior to that, gold's 1980 record was $875, which tops $2,200 when adjusted for inflation.
"Gold right now is not a commodity," said Frank Lesh, broker and futures analyst with FuturePath Trading. "It's the international currency."
Gold has often traded inversely to the U.S. dollar because the metal is seen as an inflation hedge and alternative currency. At the moment, however, both gold and the dollar are seen as safe-haven plays, benefitting along with Treasurys from the pummeling equities are taking.
But the stronger dollar, in turn, is pressuring industrial commodities because it makes dollar-denominated products more expensive for those using other currencies, dampening demand.
"We're having a battle of the safe havens between the buck and gold right now," said Ralph Preston, senior market analyst with Heritage West Financial.
The ICE Futures U.S. dollar index has risen more than 9% from this year's low of 80.854 points during the first days of January to its 2009 high of 88.254.
Another shift underlying the strength of investment demand for gold lies in the relationship of the metal with oil.
Often in years past, gold tended to track oil, as rises in crude were seen as a potential sign of inflation and because funds often moved into other commodities at the same time they were buying oil.
But front-month crude oil, currently below $40 a barrel, is a shadow of its former self, after it had peaked at $147.27 on the New York Mercantile Exchange last summer.
Leonard Kaplan, president of Prospector Asset Management, also noted that fundamental demand for gold, in the form of jewelry, is poor.
The focus in the gold market at the moment is clearly the strong investment demand rather than any other factors such as jewelry, Brian Hicks, co-manager of U.S. Global Investors' Global Resources Fund.
This is especially the case as tons of gold keep pouring into exchange-traded funds, he continued. As of the end of business Friday, gold holdings backing the world's largest such ETF, SPDR Gold Shares, stood at a record 1,028.98 metric tons, up 32% from 780.23 as of the end of last year.
"This is the primary distinction between now and in prior rallies over the past eight-year bull market for gold," Hicks said. "This is underlined by very strong physical demand for gold and coins. We see very high premiums for physical gold and hoarding of gold taking place."
But lacking the investment interest, other commodities have been hurt by the weaker-demand implications of a softer economy.
"For oil, copper and other base metals, with industrial production coming down, there is simply not as much demand for those commodities because they are economically sensitive," Hicks said.
Some of the pressure on other commodities even stems from the high prices that occurred in 2008, and producers responded to those high prices by increasing production, said Stephen Platt, analyst with Archer Financial Services.
Other commodities are coming off due to the economy, and gold is going up on fears about the economy, Lesh said. Investors are hoping gold is "somewhere you can go and you won't lose money," he said.
Under normal conditions, gold and other commodities are highly correlated, Hicks said.
But "there is a definitely some disconnect right now," said Zachary Oxman, senior trader with Wisdom Financial.
While other commodities are in the thrall of a deflationary trade, gold is benefiting from a longer-term view that expensive government economic rescue measures will lead to inflation down the road, Oxman said.
"People are finding gold to be a safe haven," Platt said. "There's no place else to hide."
Market participants are leery of stocks and other financial assets, particularly amid general fears of potential bankruptcies.
"Folks are scratching their heads," said Sterling Smith, vice president with FuturesOne. "They don't know where to put money. People seem to feel safe right now buying gold."
Source: COMMODITY CONTROL
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