Forex Flash: Gold lacks key drivers for demand – UBS

FXstreet.com (Barcelona) - Gold prices were already trading in a heavy manner heading into this week as news of Cyprus' gold sales to fund its bailout prompted fears of heavy supply from European national central banks, However, the weak China growth data for Q1 may have proven to be one of the straws that will break the camel's back by introducing a macro driver.

According to Research Analyst Gareth Berry at UBS, “Leaving aside the idiosyncrasies supply and demand imbalances in the gold, the view that none of the world's key economic engines will generating any marginal growth this year may have put paid to any expectations for the end to disinflation in G10 economies, and higher inflation in Emerging Markets, all of which remain key drivers for structural gold demand.”

If we apply the same reasoning to commodity bloc currencies, then indeed there is a case to add to short positions in AUD, NOK, NZD, CLP and ZAR as the performance of these currencies are as dependent on inflation expectations as structural demand. However, gold's correlation (20-day rolling returns) with inflation expectations, measured by the 5y-5y forward breakeven, is flat at present.