If gold is a safe-haven asset, then why did spot gold prices fall from a high of $1,671.70 to a low of $1,527.02 in just 15 days? Does this mean that it should be sold along with the Aussie, euro, and other high-yielding assets? Here are two practical reasons why gold weakened in the past couple of days.
1. Gold lost its hedging appeal.
Before you scratch your head or flip a table in confusion, we must first remember that gold is mainly traded as a hedge against currency speculation and not as a safe-haven asset. Investors usually buy gold when holding fiat currencies look risky, and then sell the metal when other asset classes look more attractive. It doesn’t necessarily have to behave as a safe-haven or a high-yielding, risky asset.
With the possibility of a Grexit and debt contagion in the euro zone dominating newswires lately, it’s not hard to imagine gold losing its hedging appeal. Recall that the value of gold is highly sensitive to investors’ perception.
And with unprecedented events like a Grexit and a possible euro zone breakup rousing uncertainty in the global markets, more than a few investors played it safe by liquidating their gold investments. After all, there’s no guarantee that gold will continue to be valuable against currencies if financial markets start going haywire.
If you believe that there would be a zombie apocalypse next month, wouldn’t you exchange your cash (which would be as useful as toilet paper in zombieland) to something more useful like guns, ammo, and food? Yeah, that’s what I thought. This is what gold investors did as uncertainty pushed them into converting their gold to more useful assets like the widely-traded Greenback.
2. Investors had no choice but to sell gold
While some investors moved their money out of gold due to uncertainty, other traders simply had no choice. Greece’s failed elections, debt contagion concerns, and QE speculations struck risk sentiment hard this month and caused sharp consecutive losses to stocks, commodities and other asset classes.
As a result, many investors were forced to liquidate their gold investments in exchange for cash to provide margin for losses in other asset classes or investor redemptions. In fact, CFTC recently reported that hedge funds and other money managers liquidated more than $2 billion worth of gold futures last week alone. Yikes!
Gold’s technical conditions weren’t any help either. Spot gold had been failing to breach the $1,700 major psychological level since mid-March, so it was easy for investors to speculate on its overbought conditions and a possible mid-term correction.
Not all hope is lost for gold though. Spot gold ended the day in the green for the second day in a row yesterday. Interestingly, it started gaining ground when the weak Philly Fed manufacturing index hinted at more QE from the Fed. For some market players, this translated to weak Greenback and strong gold.
Does this mean that gold is back to predictably trading as a safe-haven asset? Maybe, but don’t count on it just yet. We’re trading in an unusually uncertain market environment after all. At the very least you should keep an eye on gold’s price action over the next couple of days to see if a new trend forms for the shiny metal.