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By Shavasb Bohdjalian
Gold prices have fallen nearly 20 percent over the past two weeks and according to some analysts prices could fall further amid the global uncertainties and forcing many investors to question whether gold is still a safe haven.
The decline is blamed on widespread anxiety about prospects for a global recession as a result of the euro zone debt crisis, selling by hedge funds covering shortfalls on their other holdings and fears of an imminent slowdown in China. The same fears and worries have also led the prices of other precious metals lower, led by a 60 percent drop in silver.
A recovery in the dollar has also pressured gold lower, while the recent margin increase by the CME Chicago Futures on gold, silver and copper forced more speculators to cut their positions and added to the wave of selling.
In 2008, spot gold prices initially shot up after Lehman Brothers' bankruptcy, but soon tumbled more than 25 percent within two weeks in October as speculators abandoned risky assets and moved back to the relative safety of the dollar. A number of analysts say the the current eurozone debt crisis is very similar to the 2008 Lehman crisis.
However, it may be too early to completely write off gold as a safe haven since the dollar is no where near to being considered as a safe haven considering that the Fed has printed trillions of dollars of currency and used them to buy US Treasuries. If the Europeans decide to expand and leverage the EFSF, or allow the Fund to borrow from the ECB to purchase eurozone bonds, the same theory could also apply to the euro.
The key to future direction of gold rests on two important factors. The first one is the direction of interest rates and inflation. There is no doubt that the Fed, the ECB and other major Central Banks believe they have inflation firmly under control and are determined to keep monetary policy relaxed with the Fed stating that it will keep rates at exceptionally low levels for at least another 2 years and the BoE considering adding to its bond purchase programme.
There is no doubt that the Fed, the BoE, Japan and very soon the ECB will print more money to purchase government bonds and thus force long terms interest rates lower in a vain attempt to persuade banks to start lending again. In other words, the cost of money is cheap and very likely is going to become even cheaper and all solutions to solving the debt crisis involves printing more money again, irrespective of whether this is in the US, Europe, UK or Japan.
The second important factor to consider is whether or not China’s boom has busted or if the country will continue to record high growth and large investments in infrastructure and real estate. After all, gold and other metals have been rallying because of the belief that China and the other Far East tigers will continue to record super high growth rates. If the next batch of economic figures from China point to high growth and spending, then the current drop in the price of gold may be viewed as a nice correction and a wonderful opportunity to invest again in gold. But if the news from China continues to disappoint, then investors should brace for a much deeper correction in gold and other metals as the world prepares for many more months of uncertainty, liquidation of positions and speculative selling.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
