Gold’s drop could chip at its safe-haven image
NEW YORK (AP) — Maybe gold isn’t so safe after all.
After months of setting record after record, the price of gold plunged US$104, or 5.6 per cent, last Wednesday to finish at US$1,757 per ounce. That was the biggest percentage drop in nearly 3 1/2 years and a blow to investors who thought the metal could go only one way — up.
“Gold was considered a safe haven for years because it wasn’t popular, but now it’s popular,” said Cetin Ciner, a professor of finance at the University of North Carolina-Wilmington. “You can’t have a fad and a safe haven at the same time.”
The drop Wednesday came on news that orders for long-lasting manufactured goods rose four per cent in July, which was more than analysts had expected. Investors may also have been selling on news of new rules in China requiring traders to set aside more collateral when borrowing money to buy gold. After gold settled in the US Wednesday, exchange operator CME Group announced it was raising its collateral requirements, too.
Considered a safe investment in times of turmoil, gold has become a favourite among investors worried about rising US debt, the possibility of inflation and a spreading debt crisis in Europe. But many investors have simply been looking to profit from gold’s ever-rising price.
In October 2007, gold traded for about US$740 an ounce. Two months later, the Great Recession started and gold began creeping up. This summer, the rise accelerated. Gold started July at US$1,482.60 an ounce and on Monday hit a record US$1,891.90 — a gain of 28 per cent in less than two months.
Helping push the price higher lately have been big price swings in the stock market. Frightened investors have been shifting money into assets that seem less volatile, like treasury bonds and gold.
But now the belief that gold can provide relief from the roller coaster of stocks may be tested.
The danger of investing in gold is that the metal has no intrinsic value. It doesn’t pay interest like a bond, or represent a share of a company like a stock. It is only worth what people believe it’s worth, and that means that prices can rise and fall based on emotion.
