Gold prices have fallen along with stocks lately, leaving many investors wondering why gold hasn't taken on its usual role as a safe haven in times of turmoil.Even after a 2.2% gain Friday, to $729.10 per troy ounce, gold futures were down 7.1% for the week and 16.6% so far this month. The Dow Jones Industrial Average, meanwhile, fell 5.3% for the week and 22.8% in October, while stocks around the world are plunging amid fears of a global recession.
There are many possible reasons for the slide in gold prices, including the suddenly firmer dollar, because gold is priced in dollar terms. Some financial institutions are unwinding commodities bets as they reduce leverage and shore up capital. India, a big consumer of gold wedding rings and gold wedding bands, recently has shown signs of sluggish buying as the rupee depreciated against the dollar, making gold more expensive for Indian jewelry makers.
"Gold will show its value once the dollar stabilizes," said Li Shanquan, portfolio manager of the $1.6 billion Oppenheimer Gold & Special Minerals Fund.
But other market participants remain perplexed. "Every time gold is up or down, these same excuses are frequently and repeatedly given," said Jeffrey Nichols, managing director of American Precious Metals Advisors, adding that there must be something else going on.
In his newsletter of Oct. 16, Mr. Nichols suggested that central banks might have stepped up gold lending recently, which would push down prices. In leasing transactions, bullion dealers borrow gold at a relatively low interest rate, then sell it into the spot market and use the cash proceeds to invest in Treasury bills at a higher rate. These gold sales might account for an additional source of supply, Mr. Nichols said.
Others, however, discount that theory, arguing that central banks are unwilling to lease their gold because of counterparty-risk concerns.
There have been wild price swings in recent months. In the third quarter, the price for gold ranged from $741.30 to $977.70 an ounce, more than twice the price range in the second quarter, and volatility is continuing to rise this month. "How can something that has increased by 50% in volatility be a safe haven," asked Alan Plaugmann at Copenhagen-based Saxo Bank.
Francisco Blanch, a commodity strategist with Merrill Lynch, said the recent implied volatility "shows the market is much divided" about the outlook for gold, while market sentiment is tilting downward for most other commodities. The World Gold Council said higher volatility should be "put in perspective" and gold remains less volatile.
In other commodity markets:
CRUDE OIL: Futures retreated as the decision by the Organization of Petroleum Exporting Countries to trim its output target by 1.5 million barrels a day failed to counteract concerns about shrinking demand. Light, sweet crude oil for December delivery settled $3.69, or 5.4%, lower at $64.15 a barrel on the New York Mercantile Exchange. This is the lowest since May 31, 2007.
EXCHANGES: The Minneapolis Grain Exchange said Friday it plans to close its trading floor Dec. 19 and move exclusively to electronic trading for its hard red spring wheat futures and options. It currently trades wheat simultaneously on the floor and on the CME Group's Globex platform. After the floor is closed, the MGE will continue to trade electronically on the CME Group's Globex platform.
