UBS: Gold remains a safe haven despite weaker demand; Shows no reaction to Greece

According to UBS, gold remains a strong safe-haven asset despite changing dynamics in the marketplace during the last 15 years.

A good example of gold’s shifting dynamic is that it hardly responds to the lingering uncertainty in Greece’s bailout negotiations. Although the talks are progressing the country is getting closer to defaulting on a debt payment, as no deal has been concluded.

Over the weekend, European Commission President Jean-Claude Juncker called on Greek Prime Minister Alexis Tsipras to come up with alternative economic reforms "swiftly" so that the talks could continue this week. Tsipras took a defiant stance in a speech in his country’s parliament on Friday. More pressure was added on him, as French Finance Minister Michel Sapin said on Sunday that a deal on Greece debt to keep the country in the eurozone would be impossible after the end of June.

On Thursday the IMF and Greek officials notified that Greece plans to bundle its loan repayments to the International Monetary Fund falling due this month, into one payment of around $1.7 billion.

Strategists Edel Tully and Joni Teves, the authors of the UBS report, said there are a number of factors why gold was hardly impacted by the lasting Greece crisis and one might be headline fatigue, as last-minute short-term deals have been made, simply pushing the deadlines further down the road. At the end of the day, investors have become complacent to the risks of a Grexit.

Economists have previously cautioned of the complacency markets seem to have regarding the situation, "for although the UBS base case is that Greece will remain in the eurozone, the risk of an exit is likely to increase as a comprehensive deal remains elusive and as the possibility of a default rises,” the authors said.

Moreover, strategists believe that the European economy is healthier than it was in 2011 and could survive a Greek exit from the euro area.

Overall, UBS considers that a new tendency the gold market faces is that markets have a higher threshold for pain compared to previous years.

“The reality is that financial markets have been through a lot: the global financial crisis, economic recessions, the European sovereign debt crisis, and geopolitical tensions in various regions,” UBS's commodity strategists said noting that more weighty changes in the status quo are needed to obtain more reaction from gold.

“Considerably more significant changes in the status quo are needed to elicit a reaction from gold.”

Tully and Teves believe that European uncertainty is helping to support prices.

While few investors are currently jumping into gold, more are holding the precious metal as a shelter, they added.

“The reality is that gold holdings have increased over the past decade or so and, even taking into account the cleanout in 2013, the market is still longer than it was in the previous decade,” they said.

“Holding gold as an insurance against tail risks suggests that the position tends to remain relatively stable after it is first put on. As gold is accumulated, the propensity to add to holdings on the back of fresh uncertainty and risks naturally diminishes gradually over time.”

Investors’ current gold positions are currently viewed as durable, with the remaining “strong hands” expected to help stabilize the marketplace.