Interesting times ahead for yellow metal

The gold price could previously be relied on to rise when other more risky assets declined; those days are behind us judging by recent trends.

The market volatility that erupted at the start of August has been accompanied by strong rises in the gold price, so the recent fall in the price of the yellow metal comes as something of a surprise.

If anything, concerns about the global economy, which are centred on the ongoing problems in the eurozone, have heightened, so the appeal of gold as a “haven” in times of turmoil should have increased. Yet the price of an ounce of gold tumbled towards $1,500, having earlier hit highs near $2,000.

But demand for other “safe” assets, such as US dollars and bonds issued by governments deemed unlikely to default, such as the US, UK and Germany, has also increased. One specific reason for the fall in the gold price seems to be that the Chicago Metals Exchange, a major market for gold, has raised the minimum requirements for investors to trade in the metal.

However, the selling continued much more than might have been expected, suggesting that wider factors are at play. Could the fact that even the gold price is vulnerable signal the seriousness of the current economic uncertainties?

Analysts are divided over what the move means for the longer-term gold price. Natalie Robertson, a commodity analyst with the ANZ bank, is quoted in the Sydney Morning Herald as saying: “These falls are the result in a shift in sentiment rather than a shift in fundamentals and should represent very attractive buying opportunities. Certainly a lot of speculators have been washed out the market and once prices do start to bottom, things should bounce quite hard."

But the investor Marc Faber, who has strong exposure to gold, thinks the price of gold could fall to as low as £1,100 to $1,200, although he does think it will rebound in the longer term.

One possible indicator of future gold prices is previous behaviour. Prices fell sharply during the 2008 financial crisis, but then rallied sharply. Whether this pattern is repeated in the current circumstances perhaps depends on the extent of the current difficulties. A complete global meltdown could result in falling prices of all assets, including gold, while a repeat of something along the lines of what happened in 2008 could result in another rally.

One thing that seems certain though is that the latest bout of volatility has affected the perception of gold as a haven asset. Investors seeking stability in prices are likely to think twice about investing in gold and perhaps turn their gaze towards other assets, such as government bonds and defensive stocks. Also, at least for the very short term gold may have less appeal as a hedge against inflation.

Up to now the price has followed a slightly boring trend of rising whenever other assets, such as stocks, have declined, but as elsewhere in the financial markets, things have become more interesting in the gold market.