We noticed you're blocking ads.

Keep supporting great journalism by turning off your ad blocker.

Questions about why you are seeing this? Contact us

Font Size

- Aa +

Sun 18 Dec 2011 08:06 AM

Font Size

- Aa +

Investors' cash grab shreds gold's safe-haven status

Gold may slide to year-end as investors liquidate positions in scramble for dollars

Investors' cash grab shreds gold's safe-haven status
Investors warned gold could continue its slide through to the end of 2011

Investors' dash for cash has overwhelmed gold's traditional
status as a haven from risk, putting the metal on course for its first
quarterly fall since end-September
2008, when the global credit crunch was at
its worst.

Investors said gold could continue its slide through to the
end of 2011 as they liquidate positions in a scramble for dollars at the end of
a difficult year, with the euro zone debt crisis causing money markets to seize
up.

"We are sitting on quite a lot of cash, I think a lot
of people are," said Rupert Caldecott, chief investment officer of the
asset allocation team at Dalton Strategic Partnership, which has a total of
around $2.4bn  under management.

"With so many assets declining daily in value, cash has
its merits. The bond markets are offering no help. The problem with safe havens
is that they have proven not to be safe at all and the list is getting shorter.
It may only be cash very shortly."

Gold made a tentative bounce on Thursday after falling 3.5
percent, but was still hovering near a 2/1-2 month low, and it may take months
for the metal to recover.

Investors' recent tendency to hold cash, rather than hard
assets,has become more evident as the end of the year approaches.

The most recent Reuters asset allocation poll showed global
portfolio managers held more cash in November than at any time during at least
the last seven years, another of the factors undermining gold's safe-haven
properties recently.

"In a period of liquidity contraction and severe
distress, investors need to raise cash and gold prices suffer," said
Sabine Schels, head of fundamental commodity research at Bank of America
Merrill Lynch."We saw that in 2008/2009 after the collapse of Lehman
Brothers."

A resurgent dollar against the euro has also proved a
headwind to gold, with the euro near an 11-month low to the US currency.

A stronger dollar often encourages non-US holders of gold to
sell the metal to lock in a higher profit in their own currencies.

"At the moment gold is moving in tandem with the euro
and in the short-term currencies will continue to be the main driver for
gold," said Ross Norman of Sharps Pixley. "It's all about the US
dollar."

"If at the start of the new year we see great strength
I think that will be deeply encouraging for gold bulls for the remainder of
2012 but the first few weeks will be key."

Some investors said the sell-off could be exagerrated and
they still like gold, which is shown by the resilience of holdings of the metal
in exchange-traded funds (ETF), which remain near record highs.

"We see no let-up in the investor interest in gold. ETF
inflows have continued to hold up and there is a need for emerging central
banks to diversify their reserves into gold," Schels said.

Global holdings of gold in the major exchange-traded funds
tracked by Reuters remain above 70 million ounces, close to this month's record
70.148 million ounces, as inflows into European funds offset outflows from
large US products such as the SPDR Gold Trust, the world's biggest gold-backed
ETF.

Although the gold price is suffering from investors' desire
for the safety of cash, the risk that this $116bn stash of bullion could be
jettisoned is slight, analysts say.

"We remain bullish on the long-term outlook for gold
and comfortable with the relatively modest position that we currently hold for
the time being," Charles Morris, head of absolute return, HSBC Global
Asset Management, said in a note.

Arabian Business: why we're going behind a paywall