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

Karzai's Legacy: Missed Opportunities?

Afghanistan's president leaves behind a much different nation than the one he inherited, yet his legacy from 13 years in power is getting mixed reviews More

Video Secret Service Chief Under Fire for White House Security Breach

Julia Pierson faces tough questions from lawmakers after recent intrusion at White House, says: 'It is clear that our security plan was not executed properly' More

Frustrated, Liberian Students Want Ebola Fight Role

Thousands have volunteered to go to counties, rural villages to talk to people in their language about deadly virus More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Malaysia Struggles to Stop People Joining Jihadi
X
Mahi Ramakrishnan
September 30, 2014 2:16 PM
Malaysian authorities say militant groups like the so-called "Islamic State" have used social media to entice at least three dozen Malaysian Muslims to fight in what they call "jihad" in Syria and Iraq. As Mahi Ramkrishnan reports from Kuala Lumpur, counterterrorism police are deeply worried about what could happen when these militants return home.
Video

Video Malaysia Struggles to Stop People Joining Jihad

Malaysian authorities say militant groups like the so-called "Islamic State" have used social media to entice at least three dozen Malaysian Muslims to fight in what they call "jihad" in Syria and Iraq. As Mahi Ramkrishnan reports from Kuala Lumpur, counterterrorism police are deeply worried about what could happen when these militants return home.
Video

Video Could US Have Done More to Stop Rise of Islamic State?

President Obama says airstrikes against Islamic State militants in Syria will likely continue for some time because, in his words, "there is a cancer that has grown for too long." So what if President Obama had acted sooner in Syria to arm more-moderate opponents of both the Islamic State and the Syrian government? VOA State Department Correspondent Scott Stearns reports from the United Nations.
Video

Video Treasure Hunters Seek 'Hidden Treasure' in Central Kenya

Could a cave in a small village in central Kenya be the site of buried treasure? A rumor of riches, left behind by colonialists, has some residents dreaming of wealth, while others see it as a dangerous hoax. VOA's Gabe Joselow has the story.
Video

Video Iran's Rouhani Skeptical on Syria Strikes

Iranian President Hassan Rouhani expressed skepticism Friday that U.S.-led airstrikes in Iraq and Syria could crush Islamic State militants. From New York, VOA’s Margaret Besheer reports the president was also hopeful that questions about Iran’s nuclear program could be resolved soon.
Video

Video US House Speaker: Congress Should Debate Authorization Against IS

As wave after wave of U.S. airstrikes target Islamic State militants, the speaker of the Republican-controlled House of Representatives says he would be willing to call Congress back into session to debate a formal, broad authorization for the use of military force. VOA’s Michael Bowman reports from Washington, where legislators left town 10 days ago for a seven-week recess.
Video

Video Ebola Patients Find No Treatment at Sierra Leone Holding Center

At a holding facility in Makeni, central Sierra Leone, dozens of sick people sit on the floor in an empty university building. They wait in filthy conditions. It's a 16-hour drive by ambulance to Kailahun Ebola treatment center. Adam Bailes was there and reports on what he says are some of the worst situations he has seen since the beginning of this Ebola outbreak. And he says it appears case numbers may already be far worse than authorities acknowledge.
Video

Video Identifying Bodies Found in Texas Border Region

Thousands of immigrants have died after crossing the border from Mexico into remote areas of the southwestern United States in recent years. Local officials in south Texas alone have found hundreds of unidentified bodies and buried them in mass graves in local cemeteries. Now an anthropologist and her students at Baylor University have been exhuming bodies and looking for clues to identify them. VOA’s Greg Flakus has more from Waco, Texas.
Video

Video Ebola Robs Liberians of Chance to Say Good-Bye to Loved Ones

In Liberia, where Ebola has killed more than 1,500 people, authorities have worked hard to convince people to allow specialized burial teams to take away dead bodies. But these safety measures, while necessary, make it hard for people to say good bye to their loved ones. VOA's Anne Look reports on the tragedy from Liberia.
Colonel Steve ‘Spiros’ Pisanos left Greece and came to the U.S. to learn to fly. He flew fighters for the Allies in World War II, narrowly escaping death multiple times.Colonel Steve ‘Spiros’ Pisanos left Greece and came to the U.S. to learn to fly. He flew fighters for the Allies in World War II, narrowly escaping death multiple times.

AppleAndroid

World Currencies

EUR
USD
0.7866
JPY
USD
109.25
GBP
USD
0.6139
CAD
USD
1.1120
INR
USD
61.428

Rates may not be current.