Cash—Not Gold—Is New Safe Haven for Investors

In an investment climate ruled by fear and volatility, not even gold is a safe bet anymore.

These days, cash is king.

Gold was a popular safe haven for investors earlier this year when the dollar was getting hammered, oil was soaring and the outlook for stocks was uncertain at best.

But with global fallout from the collapse of Lehman Brothers and the continued credit crisis, investors have fled gold because of worries that it no longer provides shelter in the current storm.

"(Contrary to) times past, we really haven't seen this rush to gold as some sort of safety net. All we're really seeing right is a drop in the gold market," says Darin Newsom, of DTN commodities analysts in Omaha, Neb. "There's no real reason to believe this is going to be the backbone of the commodities market."

Gold futures prices were lower Tuesday after plunging Monday, when they fell $42.20 an ounce to $776.80, about 25 percent below its historic high of $1,033 in March but still about 13 percent above its most recent lows. Gold fell another $6 in early trade Tuesday. The move Monday came as oil prices fell 7 percent and the dollar continued to show strong gains as well.

A stronger dollar helps sap investor appetite for commodities, which trade in dollars and thus are more appealing and a better bargain when the greenback weakens. That's what happened earlier this year amid a slew of Federal Reserve interest-rate cuts.

But it was more than fundamentals dragging down gold.

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With little reason to believe in any of the traditional asset classes, investors simply aren't showing faith in anything right now—and gold is paying the price.

"This is a very tough market," says Sean Brodrick, commodities analyst for Weiss Research's Money and Markets investor guide. "This has really been acting beyond the normal fundamentals. In fact, it's making fundamentals superfluous at this point."

Still, Brodrick is long on gold at the moment as he thinks there probably is support around the $735 level. He predicts that if gold can climb to about $840 it could go to $900.

But there are a number of dynamics at play. Brodrick thinks if any significant ones go against gold and the metal fails a retest of its lows, it could fall to $650.

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"I don't think gold is quite the safe-haven play now. That doesn't mean it won't be later," he says. "It could go one way or the other. I am long gold in my portfolio because of last week's action and will stay so until I get a signal telling me that's not what to do."

But Newsom sees the storm clouds growing over gold, and he thinks a plunge below $700 is more likely than a move higher.

If last week's stock market rally continues to be erased--the Dow fell 7 percent Monday though futures indicated a higher opening Tuesday--Newsom thinks gold could see $640.

"I just don't see anything that's attractive to start pulling a lot of money back into gold," Newsom says. "After the rally we saw last week it's not surprising that we're seeing a retracement. That has the tendency to trigger technical trading systems. It's not a real surprise that once we got through the holidays that the pressure came back into the market."

If there's a bright side to the tumble in gold prices it's that the metal's fall is far less steep than oil. Crude has tumbled about 65 percent from its high reached over the summer, more than double the move lower for gold.

And there are a host of other wildcards out there that could send gold back up again, particularly the trend of global central banks to devalue currency. There is some thought that the Federal Reserve will reduce its fed funds rate to zero at some point early next year.

That would resume gold as a hedge trade against weak US currency.

"It's very hard to be sure where the market is going, especially when central banks of the world are coming in and pushing it around at a whim," Brodrick says. "They're picking the winners and losers these days. Most investors can't be blamed for going into cash."

"That said, on a weekly basis we're pretty oversold. It wouldn't be a surprise to see a late-year rally...What we really have to see is if people come in and buy the dip. That should give us a clue."

But Newsom thinks that somewhere in the $600s is the true support level for gold at this point.

"In the grand scheme of things gold has lost less than, say, the crude oil market," he says. "Maybe it is in a way recapturing its old role of the geopolitical hedge in times of turmoil, just not to the degree to provide it a lot of support this time."

© 2012 CNBC.com