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

China May Be Biggest Winner From Ukraine Crisis

Missile sales, oil and gas shipments are among many areas that may drive Beijing and Moscow closer together in coming years More

Obama Faces Chaotic World, Limits of Power

Current foreign policy issues bring into focus challenges for US policymakers who are mindful of Americans' waning appetite for overseas military engagements More

SADC Meeting Lesotho Officials to Resolve Stalemate

Official says regional bloc has been engaged with leaders in Lesotho to resolve political disagreement that led to coup attempt More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
West Africa Ebola Vaccine Trials Possible by Early 2015i
X
Carol Pearson
August 30, 2014 7:14 PM
A U.S. health agency is speeding up clinical trials of a possible vaccine against the deadly Ebola virus that so far has killed more than 1,500 people in West Africa. If successful, the next step would be a larger trial in countries where the outbreak is occurring. VOA's Carol Pearson has more.
Video

Video West Africa Ebola Vaccine Trials Possible by Early 2015

A U.S. health agency is speeding up clinical trials of a possible vaccine against the deadly Ebola virus that so far has killed more than 1,500 people in West Africa. If successful, the next step would be a larger trial in countries where the outbreak is occurring. VOA's Carol Pearson has more.
Video

Video Survivors Commemorate 70th Anniversary of Nazi Liquidation of Jewish Ghetto

When the German Nazi army occupied the Polish city of Lodz in 1939, it marked the beginning of a long nightmare for the Jewish community that once made up one third of the population. Roughly 200,000 people were forced into the Lodz Ghetto. Less than 7,000 survived. As VOA’s Kane Farabaugh reports, some survivors gathered at the Union League Club in Chicago on the 70th anniversary of the liquidation of the Lodz Ghetto to remember those who suffered at the hands of the Nazi regime.
Video

Video Cost to Raise Child in US Continues to Rise

The cost of raising a child in the United States continues to rise. In its latest annual report, the U.S. Department of Agriculture says middle income families with a child born in 2013 can expect to spend more than $240,000 before that child turns 18. And sending that child to college more than doubles that amount. VOA’s Deborah Block visited with a couple with one child in Alexandria, Virginia, to learn if the report reflects their lifestyle.
Video

Video Chaotic Afghan Vote Recount Threatens Nation’s Future

Afghanistan’s troubled presidential election continues to be rocked by turmoil as an audit of the ballots drags on. The U.N. says the recount will not be completed before September 10. Observers say repeated disputes and delays are threatening the orderly transfer of power and could have dangerous consequences. VOA correspondent Meredith Buel reports.
Video

Video Ukraine Battles Pro-Russia Rebel Assault

After NATO concluded an emergency meeting to discuss the crisis in eastern Ukraine, the country is struggling to contain heavy fighting near the strategic port of Mariupol, on the Azov Sea. Separatist rebels are trying to capture the city, allegedly with Russian military help, and Ukraine's defense forces are digging in. VOA's Daniel Schearf spoke with analysts about what lies ahead for Ukraine.
Video

Video Growing Business Offers Paint with a Twist of Wine

Two New Orleans area women started a small business seven years ago with one thing in mind: to help their neighbors relieve the stress of coping with a hurricane's aftermath. Today their business, which pairs painting and a little bit of wine, has become one of the fastest growing franchises across the U.S. VOA’s June Soh met the entrepreneurs at their newest franchise location in the Washington suburbs.
Video

Video Ebola Vaccine Trials To Begin Next Week

The National Institutes of Health says it is launching early stage trials of a vaccine to prevent the Ebola virus, which has infected or killed thousands of people across West Africa. The World Health Organization says Ebola could infect more than 20,000 people across the region by the time the outbreak is over. The epidemic has health experts and governments scrambling to prevent more people from becoming infected. Zlatica Hoke has more.
Video

Video Asian Bacteria Threatens Florida Orange Trees

Florida's citrus fruit industry is facing a serious threat from a bacteria carried by the Asian insect called psyllid. The widespread infestation again highlights the danger of transferring non-native species to American soil. VOA’s George Putic reports.
Video

Video Aging Will Reduce Economic Growth Worldwide in Coming Decades

The world is getting older, fast. And as more people retire each year, fewer working-age people will be there to replace them. Bond rating agency Moody’s says that will lead to a decline in household savings; reducing global investments - which in turn, will lead to slower economic growth around the world. But experts say it’s not too late to mitigate the economic impact of the world’s aging populations. Mil Arcega has more.
Video

Video Is West Doing Enough to Tackle Islamic State?

U.S. President Barack Obama has ruled out sending ground troops to Iraq to fight militants of the so-called Islamic State, or ISIS, despite officials in Washington describing the extremist group as the biggest threat the United States has faced in years. Henry Ridgwell reports from London on the growing uncertainty over whether the West’s response to ISIS will be enough to defeat the terrorist threat.
Video

Video Coalition to Fight Islamic State Could Reward Assad

The United States along with European and Mideast allies are considering a broader assault against Islamic State fighters who have spread from Syria into Iraq and risk further destabilizing an already troubled region. But as VOA State Department Correspondent Scott Stearns reports, confronting those militants could end up helping the embattled Syrian President Bashar al-Assad.
Video

Video Made in America Socks Get Toehold in Online Fashion Market

Three young entrepreneurs are hoping to revolutionize the high-end sock industry by introducing all-American creations of their own. And they’re doing most of it the old-fashioned way. VOA’s Julie Taboh recently caught up with them to learn what goes into making their one-of-a-kind socks.
Video

Video Americans, Ex-Pats Send Relief Supplies to West Africa

Health organizations from around the world are sending supplies and specialists to the West African countries that are dealing with the worst Ebola outbreak in history. On a smaller scale, ordinary Americans and African expatriates living in the United States are doing the same. VOA's Carol Pearson reports.

AppleAndroid

World Currencies

EUR
USD
0.7537
JPY
USD
103.79
GBP
USD
0.6032
CAD
USD
1.0957
INR
USD
60.522

Rates may not be current.