All of a sudden, in most parts of the world, gold has lost its safe haven status, putting the metal on course for its first quarterly fall since end-September 2008 when the global credit crunch was at its worst. Some sovereign funds and hedge funds are rapidly selling the metal and speculators cutting their positions. As a result, the price of gold has fallen 16% from an all-time high of over $1,900 per ounce in September to under $1,590 per ounce now.
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Analysts have argued that gold prices can only go up this high for several reasons: 1.) the Fed is pumping out billions which are being financialised into gold derivatives, such acts have stopped; 2.) gold is a hedge against inflation, but under the current scenario of global economic turmoil, inflation is very unlikely, instead deflation is more a possibility; 3.) uncertainty about the euro future will cause a mass switch to bullion. However, nothing can keep going up forever and the switch cannot be endless, which is why bubbles burst.
Remember, gold shot up from $32 per ounce in 1971 to over $800 per ounce in the early 1980s and then collapsed to a quarter that rate. Nobody knows whether gold will crash in coming months, but we are warned to guard against the possibility.
b -[/b] Money managers said that gold’s outlook remains bleak as they liquidate gold positions in a scramble for the safety of the U.S. dollar at the end of a difficult year, with the fettering euro zone debt crisis causing cash markets to seize up.
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30-day gold price movement
“We are sitting on quite a lot of cash, I think a lot of people are,” said Rupert Caldecott, chief investment officer Of the asset allocation team at Dalton Strategic Partnership, which has a total of around $2.4 billion under management.
“The bond markets are offering no help. The problem with safe havens is that they have proven not to be safe at all and the list is getting shorter. Now cash is the safest for us,” said Caldecott.
“Gold has had a bull run for 11 years. People are taking profits before the end of the year because they don’t know what the new year will bring,” said Axel Merk, portfolio manager of Merk Funds with $750 million assets under management.
Other money managers said that gold’s performance is more consistent as a hedge against inflation or currency devaluation rather than a “safe haven” in the traditional sense.
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Are we entering another period where holding equities is better than holding gold?
“To me, gold is not attractive right now because we don’t see any inflation threats,” said Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, a Los Angeles-based investment manager with $21 billion in assets.
UBS, Switzerland’s biggest bank seems to agree on this. “As we enter 2012, neither gold nor the Swiss franc retains a safe haven status as originally expected at the end of 2010,” UBS Chief Investment Officer Alexander Friedman wrote in the letter.
Reuters conducted a poll among 20 hedge fund managers, economists and traders. Almost half of respondents predicted bullion will fall to 1,450 an ounce in the first quarter next year, with three seeing prices as low as $1,400 an ounce. Four said they don’t expect a new record high until at least 2014.
“What is surprising is that in an environment where headline risk news is bigger than ever, gold has actually fallen from its highs,” said Christoph Eibl, CEO and founding partner of the Swiss commodity hedge fund Tiberius. “We believe that, in 2012, of all metals, gold will be the worst performing,” Eibl said.
“We have the beginnings of a real bear market, and the death of a bull,” said veteran trader Dennis Gartman, a long-time gold bull who completely exited his gold bullion investments last week.
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Since September, gold has underperformed commodities measured by the RJ/CRB index and the euro, while U.S. equities measured by the S&P 500 eked out a slight gain.
This morning in Asian trading, gold prices edged lower after staging their biggest weekly loss in nearly three months, as Fitch’s warning on downgrading France kept investors on the edge about the situation in Europe. “In the short term we are seeing greater downside for gold,” said Ong Yi Ling, an analyst at Phillip Futures, adding that $1,550 would provide support in the near term.
Asian bullion dealers and jewelers however, are thrilled with the recent price fall. The upcoming January-February wedding season in India, and the Chinese New Year, celebrated in much of Eastern Asia, will see a jump in demands for gold. “We don’t expect much downside from the current levels for gold,” said Lalit R Jagawat, director, Nakoda Bullion, one of the leading bullion traders in Mumbai. “There is good demand for the ensuing festive season in January and February which should keep prices steady for at least the next 2 months,” said Jagawat.
