Gold’s Identity Crisis

June 1, 2012 at 08:15


If gold’s a safe haven, it certainly hasn’t been acting like one.

Gold futures ended May with a loss of 6%, the metal’s fourth-straight monthly decline.

“We are in the midst of a cash crunch globally due to the banking issues in Europe,” said Vedant Mimani, lead portfolio manager of the Atyant Capital Global Opportunities Fund, a precious metals-focused fund based in Miami.

“Whenever liquidity becomes problematic, such as it is now, assets will be sold down to meet loan and margin calls and get accounts back in line — and that is precisely why we are seeing gold sell off alongside other risk assets,” he said.

These days, any investment appears to be risky and it’s tough for investors to find safety in any asset, though the U.S. dollar and Treasury bonds have attracted more attention.

“People are rushing toward bonds, especially Treasurys, which push the U.S. dollar higher and gold lower,” said Chris Mayer, editor of Capital & Crisis.

All the while, gold has followed global equities, and other so-called riskier assets, lower.

“We’ve just gone through a period where everything has basically danced to the same tune and the Pied Piper was the U.S. [Federal Reserve’s] monetary policies, but that won’t continue forever,” Mayer said.

While some investors perceive U.S. Treasurys as a safe haven, they may be the “riskiest asset of all,” with holders poised to suffer “good-sized losses” in the event of a small jump in interest rates, Mayer said.

Still, as the euro crisis drags on, it’s clear that investors see Treasury bonds and the dollar as the safer bets right now, at the expense of gold.

Treasury prices have climbed, with yields on 10-year notes, which trade inversely to prices, setting a record intraday low. The ICE dollar index, which tracks the greenback’s performance against a basket of six major currencies, surged about 5% in May.

By contrast, the euro dropped 6.6% against the dollar.

“Many investors used to confuse the euro for gold, buying the single currency just to escape the dollar,” said Adrian Ash, head of research at BullionVault. “This year’s dollar rally to date has confused a lot of traders again, only this time the other way around.”

All of which is taking a toll on gold’s safe-haven appeal. Gold’s “identity crisis still needs resolving,” said Ash.

And just what constitutes that identity remains a topic of debate.