So much for gold shining in bad times, many investors must be thinking. Last week gold slumped by 9% to a five-month low under $1,600 an ounce.
Last week’s sharp sell off in risky assets instead boosted the US dollar, which, measured against its main trading partners’ currencies, is at an 11-month high. In a panic, investors ditch assets for cash, and the world’s reserve currency is the most liquid major currency.
Europe’s failure to provide a long-term solution to its debt crisis prompted euro selling and dollar buying, while the European banking system is also behind the trend.
“Financial markets in Europe have completely seized up,” says FxPro.com, “making it exceedingly difficult for banks and companies to obtain funding… they have been forced to get funding in other currencies, principally the dollar.”
There has been talk of banks selling or leasing gold to raise money, while Jack Farchy in the FT points to hedge funds and other investors aiming to preserve profits “or minimise losses” as an additional factor. During a dash for cash, gold, as one of the world’s most liquid assets, is vulnerable to sharp slides.
But as Tom Kendall of Credit Suisse points out, this is what happened to gold when Lehman collapsed amid “similar funding stresses, a squeeze on liquidity, and heightened counterparty risk”. It recovered its footing and reached new peaks, and this time, too, the long-term uptrend looks intact.
Emerging-market central banks are still buying, interest rates remain negative, and more money printing by Western central banks is on the cards. Barclays Capital sees the yellow metal averaging $2,000 next year.