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Why Gold Lost Its 'Safe Haven' Status and How It Can Get Its Mojo Back

Posted Oct 27, 2008 02:23pm EDT by Aaron Task in Investing, Commodities
Related: GLD, ^DJI, RBS, AIG, TLT, UUP, UDN

As the financial markets came unglued in recent weeks, gold has been conspicuously absent as a "harbor" for those seeking safety. In fact, forget being a haven; gold has been a hell for those long in recent week.

Ashraf Laidi, chief FX strategist at CMC Markets, says several factors explain gold's recent swoon:

  • Strength in the dollar
  • Selling by hedge funds and commodity indexers facing redemptions
  • The global nature of the crisis

Regarding the last point, Laidi notes gold fared well in the "infamous week" after Lehman Brothers filed for bankruptcy, when the yellow metal rallied from around $740 per ounce to about $925 in short order.

More recently, he notes, the crisis has not been "U.S. centric" and gold traded into the low $700s before stabilizing. Stress and strain in Europe and emerging markets is driving capital into low-yielding currencies, namely the yen and dollar (gold is priced in dollars and tends to moves in opposition.)

Gold may benefit short term from a renewed focus on "risk assets," especially if the Fed surprises the market with a bigger-than-expected rate cut on Wednesday, Laidi says. (Perhaps in anticipation, gold was rallying Monday afternoon in conjunction with stocks.)

While uncertain about what the short term will bring, Laidi is fairly confident gold -- and other commodities -- are good long-term bets because of the dollar's weak underlying fundamentals; namely, a ballooning federal deficit and increasingly loose Fed.

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