Gold fails as a safe-haven asset

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Gold fails as a safe-haven asset
Allan Seccombe
Posted: Mon, 05 Mar 2007

[miningmx.com] -- GOLD has failed spectacularly as a safe haven asset as investors gushed out of equities over the past week. The gold price has fallen rapidly to six-month lows and the outlook is bleak.

The gold price has cast off nearly $50 an ounce since reaching a nine-month high of $689 on 26 February.

�Since the first crack appeared in the equity markets about a week ago gold has failed to be a safe haven and it has failed quite badly,� said a gold analyst who declined to be named.

it has failed quite badly

�There are a lot of people heading for the exits, but there aren�t many doors open,� the analyst said.

The analyst forecast a gold price of $605, but said a colleague was more bearish and saw the gold price all the way down to $540.

Matthew Turner, an analyst from consultancy Virtual Metals, said there appeared to be a revaluation in the financial markets, prompted by the fall in Chinese stocks, worries about the US mortgage market and possible military action against Iran.

�Gold has been caught in the same flight from risk as the emerging market share prices,� he said.

In the past gold might have served as a safe haven because it was not really a mainstream asset class unlike the situation over the past year, he said.

�Gold�s fate is going to perhaps be dependent on other asset markets more than usual. If this share correction turns into a rout or a crash gold might fall further rather than recover,� he said.

A view on the fall of the gold price is that investors could be taking profits from the run up in earlier weeks to fund losses made in other markets.

The South African gold share index fell 2.5% on Monday, led by slumps of between three and four percent by AngloGold Ashanti, Gold Fields and Harmony Gold. The platinum index sank 4.2%. The platinum price was last down $37 and was bid at $1,170/oz.

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�I wouldn�t draw any massive conclusions from the fall in the platinum price. It�s off. All the metals are off. The amount it is off is not driven by anything specific to platinum. It�s a thinner, smaller market,� the analyst said.

The gold price had risen strongly up to $689 in the preceding weeks, prompting speculation in the market that it could test $700, but then the Chinese stock market soured last Tuesday, giving up nine percent in a single session.

The fall rattled sentiment around the world, with emerging markets taking a battering. In Europe and the US, stocks also fell hard. In the past money would have gone into gold, but not this time.

�Gold in this particular run up in the past few weeks was entirely a liquidity phenomenon and liquidity seems to be withdrawn from the market at the moment,� the analyst said.

�People who were buying gold in recent weeks were not doing it for safe-haven performance but as the huge liquidity trades that were out there. Once the market cracked and gold did not perform as a safe haven so no money came in. Instead you saw liquidity trades turn the other way,� he said.

Turner said gold could find a floor at $630 as physical demand comes in on the lower price. However, this forecast is heavily dependent on there not being another sharp decline in share prices.

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