GOLD: Seeing Past the Sell-Off (October 23, 2008)
Gold has fallen more than $300 – about 30% – from its all-time high of US$1034 last March to its recent lows near $720. And, since the beginning of the year, it is off about 12% – not too bad compared to most other asset classes. Looking at the decline of the past week, most analysts are saying that gold has been pulled down by the drop in oil, the strong U.S. dollar, and an easing of inflation expectations.
But, in my view, gold’s latest swift decent is a direct consequence of the unfolding global economic situation, the playing out of the credit crisis, and the onset of recession. The yellow metal was simply overwhelmed by the massive indiscriminate liquidation of financial assets and commodities – liquidation prompted by the reassessment of global economic prospects and the likely diminishing demand for one commodity after another.
To a large extent, gold was sold because the yellow metal is included in several important indexed baskets of commodities that have been liquidated en masse by hedge funds and institutional traders.
In addition, negative momentum, automatic program selling, and technical trading has compounded the damage. And, though probably not a factor in the past few days, increased central bank gold lending (as detailed in our last Gold Brief and in the adjacent article) has contributed greatly to gold-price weakness in recent weeks.
Does this mean that gold is suddenly no longer a safe haven in turbulent times . . . or a hedge against inflation . . . or a useful portfolio diversifier? Of course not — but it does demonstrate that at times of panic even the yellow metal can fall victim to developments in other asset markets.
