Just when you need it most, gold isn’t living up to its safe haven reputation. Reuters reports:
Tokyo (Reuters) – Gold dropped 1.5 percent on Tuesday as investors viewed bullion as a risky asset, preferring to lock in their positions to raise cash amid deepening financial turmoil after the implosion of Lehman Brothers…
Though gold normally gains on safe-haven buying during financial crises because its value is not tied to fiat money, portfolio managers were keen to shed positions in commodities after Lehman’s bankruptcy, the takeover of Merrill Lynch, and fears major insurer American International Group needed to raise additional capital.
As of 12:50 a.m. EDT, spot gold fell 1.5 percent, or $11.90, to $774.30 an ounce from Monday’s nominal close in New York.
“Safe-haven demand lifted gold back to nearly $800. But profit-taking emerged after seeing the market run of steam as the market focused more closely on the financial problem,” said Tatsuo Kageyama, analyst at Kanetsu Asset Management in Tokyo. “Investors want to hold cash or bonds. Gold was bought initially, but basically many investors treat gold and other commodities as risky assets.”
So, investment bank goes bankrupt. Stocks plunge along with other commodity prices (oil), the US dollar falls and gold gained a modest 3 per cent on Monday and is falling today. A $100 jump on the back of Lehman wouldn’t have been a surprise, according to some.
Why then the decline?
There’s talk of a mechanical sell-off by hedge funds as they seek to meet redemption demands. Add to that the hedge fund tendency to jump in when they smell blood (shorting shares in commodities-related stocks, etc.) and the desire for cash and you have significant downward momentum as per this chart from metals dealer Kitco:
Gold bugs are still confident of long-term demand for the precious metal. In the short-term, the major question will be how much cash is (or isn’t) sloshing around the market by the end of the week. With a number of potential bail-outs, buy-outs and bankruptcies in the works, how those play out will determine gold movements for the next few weeks at least. So much for a safe haven from the storm.