News / Economy

Rout Tarnishes Gold's Luster as Safe Haven

Liquid gold is poured into a mould at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna.Liquid gold is poured into a mould at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna.
x
Liquid gold is poured into a mould at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna.
Liquid gold is poured into a mould at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna.
Reuters
Even the most fierce gold bulls must be feeling sheepish after bullion tumbled helter-skelter to two-year lows in a couple of days, putting a question mark over how much space the metal should take in portfolios.

After 12 years of unbroken yearly gains, a Reuters poll of 37 analysts in January found that while they expected the bull run to top out, gold could see record average highs this year and next.

And even if banks had started back-pedaling on predictions that it would beat 2011's record high of $1,920.30 per ounce, most still favored the fundamental case for holding gold as an alternative currency and hedge against inflation.

And then came Cyprus. An assessment of Cypriot financing needs prepared by the European Commission showed on April 10 that the troubled island would need to sell excess gold reserves to raise around 400 million euros to help finance part of its bailout.

On the same day, minutes from the March 19-20 U.S. Federal Reserve meeting showed officials appeared on course to end their extraordinary bond-buying stimulus by year-end, which in turn would relax inflationary pressure.

Gold fell 1.6 percent, but appeared to stabilize the following day before plummeting about 5.2 percent and 8.4 percent on Friday and Monday, respectively, as selling caused more selling - the most astonishing two-day move in 30 years.

Prices were about $1,380 per ounce at 1650 GMT on Tuesday, having started Friday above $1,560 per ounce.

"[It] looks like a capitulation, but in an asset that doesn't produce cash flow it is particularly hard to decide where to buy some more and if the move is finished," said Pedro de Noronha, managing partner at London-based Noster Capital.

We were lucky to get out of all our outright long positions in the $1,560's. We are keeping an eye on it, but doing nothing for the time being," he said.

The Chicago Board Options Exchange [CBOE] Gold ETF Volatility Index, often referred to as the "Gold VIX" and viewed as a proxy for investor expectations of volatility, surged on Monday, gaining more than 60 percent as prices slumped to two-year lows.

Investors in gold-backed exchange-traded funds have headed for the door in hordes.

"I don't think anyone thought we'd see the enormous move and volume of selling that we did see. It's done a great deal of damage to investors' confidence," said Sean Corrigan, chief investment strategist at Diapason Commodities Management in Switzerland.

Corrigan added that gold's perceived efficiency as a safe haven had been declining for some time, as the factors that would normally send the market higher had failed to do that - the crisis in Cyprus being a case in point.

Downgrades and drama

There has been a recent spate of gold downgrades by investment banks; Goldman Sachs, also on April 10, cut its gold price forecasts for a second time in six weeks, citing expectations for an acceleration in U.S. economic growth and recent lower prices.

In the wake of the sell-off, prices have lost about 20 percent so far this year and about 28 percent since the record high in 2011.

And demonstrating the drama, trading volume in U.S. Comex gold futures turnover was at 689,000 lots, preliminary Reuters data showed on Monday, surpassing the previous record of 486,315 lots on Nov. 28, 2012.

Bank of America Merrill Lynch acknowledged the key triggers were fears of further central bank gold sales in the euro zone following the Cyprus proposal, with fund selling exacerbating the spectacular dive.

The bank added, however: "The gold price collapse is hard to explain when looking at traditional variables such as the trade-weighted dollar or interest rates, raising concerns that the reputation of gold as an alternative to fiat currency may have been damaged."

The jury is out on how long it will take for confidence to return, given that funds are likely to continue beating a retreat and the expectations of global economic recovery, which hurts gold market fundamentals.

Those who remain upbeat on the metal's future say the official sector - central banks - are still keen buyers of gold, and its usefulness as a liquid store of value in difficult times is indeed demonstrated by the Cyprus proposal.

"The body language of central banks doesn't seem on the whole to be sellers," said Deutsche Bank analyst Daniel Brebner.

"I'm doubtful that gold's role would be seriously strained by these three days of extreme volatility. I think there will be certainly a number of institutions that will rethink the wisdom of using gold as an investment, but time will tell if gold is truly a barbarous relic," said Brebner.

You May Like

Multimedia Ferguson Grand Jury Reaches Decision

Missouri town, many Americans on edge over whether jurors will indict white police officer in August shooting death of unarmed black teen More

Corruption Fighters Want More From World’s Strongest Nations

Anti-corruption activists say final communique fell short of expectations and failed to fully address systemic problems More

Philippines Leery of Development on Reef Reclamation in S. China Sea

Chinese land reclamation projects in area have been ongoing for years, but new satellite imagery reportedly shows China’s massive construction project More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Ukraine Marks Anniversary of Deadly 1930s Faminei
X
Daniel Schearf
November 23, 2014 4:32 PM
During a commemoration for millions who died of starvation in Ukraine in the early 1930s, President Petro Poroshenko lashed out at Soviet-era totalitarianism for causing the deaths and accused today’s Russian-backed rebels in the east of using similar tactics. VOA’s Daniel Shearf reports from Kyiv.
Video

Video Ukraine Marks Anniversary of Deadly 1930s Famine

During a commemoration for millions who died of starvation in Ukraine in the early 1930s, President Petro Poroshenko lashed out at Soviet-era totalitarianism for causing the deaths and accused today’s Russian-backed rebels in the east of using similar tactics. VOA’s Daniel Shearf reports from Kyiv.
Video

Video Hong Kong Protests at a Crossroads

New public opinion polls in Hong Kong indicate declining support for pro-democracy demonstrations after weeks of street protests. VOA’s Bill Ide in Guangzhou and Pros Laput in Hong Kong spoke with protesters and observers about whether demonstrators have been too aggressive in pushing for change.
Video

Video Law Enforcement, Activists in Ferguson Agree to Keep Peace

Authorities in Ferguson, Missouri, say they have agreed with protest leaders to maintain peace when a grand jury reaches its decision on whether to indict a white police officer in the shooting death of a black teenager. Ferguson, a suburb of St. Louis, has been the scene of intermittent violence since the August 9 shooting intensified long-simmering antagonism between the police and the African-American community. VOA's Zlatica Hoke reports.
Video

Video US Immigration Relief Imminent for Mixed-Status Families

Tens of thousands of undocumented immigrants in the Washington, D.C., area may benefit from a controversial presidential order announced this week. It's not a path to citizenship, as some activists hoped. But it will allow more immigrants who arrived as children or who have citizen children, to avoid deportation and work legally. VOA's Victoria Macchi talks with one young man who benefited from an earlier presidential order, and whose parents may now benefit after years of living in fear.
Video

Video New Skateboard Defies Gravity

A futuristic dream only a couple of decades ago, the hoverboard – a skateboard that floats above the ground - has finally been made possible. While still not ready for mass production, it promises to become a cool mode of transport... at least over some surfaces. VOA’s George Putic reports.
Video

Video Falling Gas Prices Impact US Oil Extraction

With the price of oil now less than $80 a barrel, motorists throughout the United States are benefiting from gas prices below $3 a gallon. But as VOA’s Kane Farabaugh reports, the decreasing price of petroleum has a downside for the hydraulic fracturing industry in the United States.
Video

Video Tensions Build on Korean Peninsula Amid Military Drills

It has been another tense week on the Korean peninsula as Pyongyang threatened to again test nuclear weapons while the U.S. and South Korean forces held joint military exercises in a show of force. VOA’s Brian Padden reports from the Kunsan Air Base in South Korea.
Video

Video Mama Sarah Obama Honored at UN Women’s Entrepreneurship Day

President Barack Obama's step-grandmother is in the United States to raise money to build a $12 million school and hospital center in Kogelo, Kenya, the birthplace of the president's father, Barack Obama, Sr. She was honored for her decades of work to aid poor Kenyans at a Women's Entrepreneurship Day at the United Nations.
Video

Video Gay Evangelicals Argue That Bible Does Not Condemn Homosexuality

More than 30 U.S. states now recognize same-sex marriages, and an increasing number of mainline American churches are blessing them. But evangelical church members- which account for around 30 percent of the U.S. adult population - believe the Bible unequivocally condemns homosexuality. VOA's Jerome Socolovsky reports that gay, lesbian, bisexual and transgender evangelicals are coming out. Backed by a prominent evangelical scholar, they argue that the traditional reading of the bible is wrong.
Video

Video Ebola Economic Toll Stirs W. Africa Food Security Concerns

The World Bank said Wednesday that it expects the economic impact of the Ebola outbreak on the sub-Saharan economy to cost somewhere betweenf $3 billion to $4 billion - well below a previously-outlined worst-case scenario of $32 billion. Some economists, however, paint a gloomier picture - warning that the disruption to regional markets and trading is considerable. Henry Ridgwell reports from London.
Video

Video Chaos, Abuse Defy Solution in Libya

The political and security crisis in Libya is deepening, with competing governments and, according to Amnesty International, widespread human rights violations committed with impunity. VOA’s Al Pessin reports from London.
Video

Video US Hosts Record 866,000 Foreign Students

Close to 900,000 international students are studying at American universities and colleges, more than ever before. About half of them come from Asia, mostly China. The United States hosts more foreign students than any other country in the world, and its foreign student population is steadily growing. Zlatica Hoke reports.

All About America

AppleAndroid

World Currencies

EUR
USD
0.8050
JPY
USD
117.90
GBP
USD
0.6376
CAD
USD
1.1259
INR
USD
61.655

Rates may not be current.