With this volatility, is gold still a safe haven?

www.marketwatch.com

By Myra P. Saefong, MarketWatch 

SAN FRANCISCO (MarketWatch) — Gold hasn’t been trading like a safe haven lately, leaving investors to wonder whether it still is one. 

“The volatility that the price of gold has seen lately gives the illusion that it is not a safe haven, but in reality investors still view it as a place to protect their wealth,” said David Beahm, vice president at precious-metals investment firm Blanchard & Co.

That’s tough to believe, however, given the steep drops the precious metal has suffered in recent sessions. 

Gold futures dropped to a one-month low on Tuesday, with the February contract /quotes/zigman/4331913 GCG3 +0.27%  down $25.30, or 1.5%, to settle at $1,695.80 an ounce on the Comex division of the New York Mercantile Exchange. Read: Gold slumps to one-month low below $1,700. 

 

Steep daily drops such as that one were common enough in November to send prices down 0.4% for the month, with a decline of around $40 on Nov. 2 and a fall of almost $26 on Nov. 28 being the standouts. 

Analysts admit the moves in the last few months have been eye-catching. 

Gold jumped $200 to around $1,800 an ounce in October, from about $1,600 in August. 

“That’s a huge move,” said Phil Storer, director of trading at Dillon Gage Inc., a Texas-based company that deals in the futures markets. “It probably overdid itself and now is in the process of finding a comfortable price level again.” 

“All markets do this, but gold is a headline grabber and gets more attention than the rest,” he said, adding that prices have pulled back about 60% since the high in early October, a “normal part of the market’s action.” 

Fundamentally and technically, analysts blame gold’s recent volatility on everything from hedge-fund liquidation, technical price triggers and year-end book squaring to economic, U.S. fiscal cliff and euro-zone developments and inflation and deflation prospects. Through it all and despite the selloffs, however, investor interest in gold hasn’t wavered.

Last month, the U.S. Mint had its best month for American Eagle Gold Coin sales since July 2010, according to BullionVault, the physical gold and silver exchange for private investors online. Separately, ETF Securities said holdings in gold exchange-traded products also set a record in the second half of November at over 83 million ounces. 

The Gold Investor Index, which offers a look at western investor sentiment toward gold by tracking buying and selling on BullionVault, also rose to a six-month high last month. “The gold price may look weak right at this moment but behind the scenes, investors in the West are clearly feeling the need to insure against financial risks in the coming year,” said Ben Traynor, chief economist at BullionVault.

Reasons converge

Given all the roles that gold tends to play, the metal has lots of ups and downs, but many analysts still see a strong year ahead for gold. 

So far this year, gold futures have gained over 8%. 

Blanchard & Co.’s Beahm expects 2013 to be “a great year for gold” due to the uncertainty caused by the U.S. fiscal cliff and the dependence of the U.S. economy on monetary stimulus from the Federal Reserve. 

Concerns about the fiscal cliff — billions of dollars in spending cuts and tax hikes scheduled to go into effect at the start of the year if politicians can’t agree on a budget deal — as well as political wrangling over euro-zone debt have fed volatility in gold and other markets. 

“The risk of a higher capital-gains tax rate as a consequence of fiscal-cliff discussions is resulting in some long-term gold holders booking some of their profits in 2012,” said Vedant Mimani, lead portfolio manager of the Atyant Capital Global Opportunities Fund. 

“It makes a lot of sense to book long-term gains in 2012 — lock in tax liability at the current rate and then re-position in 2013 as desired rather than hold on to long-term gains and risk a higher tax rate,” he said.

Traders and investors are also considering whether the markets are heading for a deflationary or inflationary environment. Most investors likely feel as if “we are heading into a deflationary environment, so holding gold [which is seen as a hedge against inflation] is no good to them,” said Fawad Razaqzada, technical analyst at GFT Markets. 

And then there are the purely technical, price-triggered trades. 

Adam Grimes, chief investment officer at research and advisory firm Waverly Advisors, said gold’s selloff is mostly due to technical reasons.

“Since the sharp decline off the highs in August of 2011, gold futures have defined a strong support zone in the $1,600 area,” he said. The rally in August of 2012 off of that level was a “clear and obvious bullish signal — to put it simply, you pretty much had to be long.” 

The danger with the obvious technical trade is that “when it fails, everyone will be scrambling for the exits at the same time,” he said, and November “failed to develop the kind of upside momentum that would keep bulls interested and would reassure long players that they are right.”

 Changing backdrop 

Exacerbating the moves in gold is a changing trading backdrop for the metal, one in which many traders have taken advantage of the wide variety of investment options that include derivatives and exchange-traded products. 

“The high percentage of momentum investors in paper gold has created an unprecedented amount of volatility,” said Jeffrey Sica, president and chief investment officer of Sica Wealth Management. 

“Recent declines were caused by liquidations of hedge funds to meet pending redemption requirements,” he explained. “The uncertainty of just how many investors will file for redemption of hedge funds […] is causing some momentum investors to liquidate.”

So, what about gold’s perceived status as a safe haven? 

“The tendency of leverage-oriented investors to liquidate their top-performing sectors in the midst of a stock-market decline makes gold a likely target for momentum sellers needing to meet margin requirements,” according to Sica. 

And “due to the highest percentage of momentum investors and hedge funds who own gold, it can no longer be considered the safe haven it once was,” he said. Even so, gold “can still be considered a ‘safer haven’ with great potential for appreciation in the future,” said Sica.