U.S.$ SOARS this week while GOLD tumbles to a 3-mth low
As the mood on Europe soured this week, the behavior of investors was an unwelcome development for gold bugs: the precious metal dipped to its lowest level since September, while the dollar soared.
In fact, the dollar has been trumping gold as the safest haven this year when things have looked particularly ugly for the global economy. The dollar index – which weighs the dollar against a basket of six other major currencies – rose to its highest level since January this week as investors expressed their frustration with the lacklustre outcome of last week’s EU summit.
In contrast, gold tumbled 8.8 per cent to its lowest in almost three months at $1,560 a troy ounce. In the process, it fell below its 200-day moving average – a technical indicator closely watched by some traders – for the first time in almost three years.
The move has prompted some to question whether gold’s decade-long bull market is coming to an end. Indeed, some traders have started actively betting against the gold price in the past week, bankers say.
“The gold price fall of the last couple of days will have perplexed and disappointed many,” says Ross Norman of Sharps Pixley, a retail bullion brokerage. “Gold evidently failed to uphold its primary role as a safe haven asset.”
By contrast, the US Treasury managed to sell its debt at record low yields this week. Demand for investors was strong, with a bid-to-cover ratio of 3.01 – the highest since April 2010.
“US dollar liquidity has become the preferred asset class, even outpacing gold, which was so often viewed as the ultimate asset class in times of risk aversion,” say analysts at Morgan Stanley.
That is not because things are looking rosy for the US economy. Growth is stagnant, with consumer prices failing to rise in November. While there was a dip in jobless claims last week, overall unemployment is still at dangerous levels, hovering around 9 per cent.
The reason the dollar has become a favoured currency at times of market stress is simply because it remains the world’s reserve currency, giving it the advantage of liquidity at a time when investors are still wary of buying assets they cannot sell quickly.
In fact, the dollar tends to dip on positive news from the US, because investors feel more positive about the overall global economy so move into riskier currencies.
And the sharp falls in gold this week do not represent a reappraisal by investors, analysts argue. Even after a fall of nearly 20 per cent from its September peak, gold is still the best performing major commodity over the year so far.
Instead, gold’s troubles, like the dollar’s success, reflect the strains on the financial system. Banks are seeking to reduce their balance sheets before the end of the year, while some hedge funds need to raise cash – increasing demand for dollars – to pay investors who ask for their money back.
Currency analysts are predicting that for the next few months, at least, persistent worries over the eurozone will ensure that the dollar stays strong relative to other currencies.
Yet gold could still outperform. Despite this week’s tumble, investors say the critical argument in favour of a rising gold price remains intact: the financial crisis that began in 2008 has shaken confidence in all paper currencies, leaving gold as one of the few assets whose value is not dependent on the credibility of governments and central banks.
The US Federal Reserve made no move towards a further round of “quantitative easing” when it met this week. But many believe it is only a matter of time before it does.
In fact, analysts are predicting that central banks in the US, the UK and Europe will all embark on some form of QE next year to stimulate their sluggish economies.
“Concerns about the fall out from the problems in Europe are likely to prompt the Fed to adopt a third round of quantitative easing, perhaps as early as January,” says Julian Jessop at Capital Economics.
“Even if this does not have much impact on the value of the dollar against the euro, it should weaken the US currency against gold.”
As John Fallon, president of Pia Capital, a US hedge fund, puts it: “The reason why gold is going down – and the reason why the dollar is going higher – is really a reason why gold should do well.”