Why Gold Is No Longer a Safe Haven for Investors

After falling five of the last six trading sessions, gold has given up all of its gains for 2012, settling at its lowest price of the year.

Gold bracelets are displayed at a Chow Tai Fook Jewellery Group Ltd. store in Hong Kong, China.
Bloomberg | Getty Images
Gold bracelets are displayed at a Chow Tai Fook Jewellery Group Ltd. store in Hong Kong, China.

With financial turmoil in the euro zone and global growth slowing, market watchers are starting to ask, what is driving the price of gold lower?

Nouriel Roubini, cofounder of Roubini Economics raised the question on Twitter today:

“Gold down to $1562. Gold bugs hiding deep in their gold caves pondering why gold isn't rallying in spite of sharp spike in risk-off sentiment.”

When financials systems are stressed, money tends to flow to “safe havens” which for some investors, includes gold . The reality, however has been different—money has been moving into the “safe haven” of the U.S. dollarand away from commodities including, gold.

Investors hunkering down in “risk off” mode are focused on two main themes—the deteriorating economic situation in the euro zone and the trading fiascoat JPMorgan Chase.

Analysts are writing reports with titles such as, “What if the euro zone falls apart?" and asking what other surprises might be lurking—did other banks put on trades similar to JPMorgan—are there other bad bets waiting to be announced?

Traders aren’t waiting around to find out—over the past two weeks, stocks in the S&P 500 are down over 4 percent, gold is down about 6 percent.

“What’s your downside? Flat is not a bad position to be in,” says Kevin Grady, gold trader at Phoenix Futures & Options. “People didn’t run to gold this time because the price couldn’t get through $1,700 an ounce,” he says implying that investor demand may have peaked for the moment.

Below the market, Grady sees support near $1,523 an ounce but has his eye on two potential catalysts: demand from China and Fed Chairman Ben Bernanke. Grady says that any talk of another round of easing aka QE3 could keep interest rates low and put a fire under the price of gold adding, the growing number of “shorts” in August gold futures means that any turn to the upside could be “fast and furious."

Barclays commodities analyst Suki Cooper paints a similar picture and writes,“Although our base case is for Greece to remain within the EUR, the strength of the USD has further hindered gold as it behaves in line with risky assets and U.S. treasuriesbenefit instead. The responsive physical buying that materialised last year from key markets—India and China—has become lacklustre.”

She goes on to note that demand for exchange traded products or, ETPs has remained “resilient” for now but, remains a risk factor worth watching. Barclays recently cut its price forecast for gold to $1,716 an ounce on average for calendar year 2012, with a second half forecast of $1,665 an ounce.

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