Gold, the metal that rallied during every US recession during the past three decades, may drop to a two-year low as the threat of deflation curbs bullion’s appeal.
The number of gold futures held in New York plunged 48 per cent since its January 15 peak, according to data compiled by Bloomberg. Prices fell 17 percent last month to $724.55 an ounce in London. The metal may drop to $600 by yearend for the first time since 2006, said Joel Crane, a Deutsche Bank AG strategist in New York.
While gold rose since 2000 as the world economy expanded and the dollar weakened for five of the past six years, the ReutersJefferies CRB Index of 19 commodities lost 43 per cent since reaching its peak in July as the seizure in credit markets caused economies around the world to slow and the US to contract 0.3 per cent in the third quarter. Rather than providing safety for investors, gold declined almost 31 percent since reaching a record $1,033.90 an ounce in New York on March 17.
“Gold is not considered a safe haven because investors are viewing it as part of the commodity class,” Crane said in an interview. “Commodity is a bad word right now. Through this whole credit crisis mess, cash has been king.”
Deutsche Bank expects gold, down 13 per cent this year in London, to average $861 in 2008 and $750 next year. UBS AG last week lowered its 2009 forecast to $700 from $825. Gold for immediate delivery averaged $887.31 this year.
Gold rose about 220 per cent this decade through June as expanding economies, especially in emerging markets, spurred demand for commodities and increased risks of inflation. While the CRB index rose more than 125 per cent during that period, the Standard & Poor’s 500 Index fell 13 per cent and the US Dollar Index, which measures the currency against six of its biggest trading partners, weakened 29 per cent.
Demand for gold waned amid speculation that US government efforts to rescue the banking system and the Federal Reserve’s decision to lower its target interest rate for overnight loans between banks to a 50-year low of 1 per cent will help the world’s biggest economy recover faster than Europe. The combination of falling commodities and rising demand for dollar- based assets ended gold’s bull market.
Dennis Gartman, an economist and editor of the Suffolk, Virginia-based Gartman Letter, exited all his gold positions, except for coins he purchased at the end of September. “I feared the whole financial system was coming to a halt, and you need a little gold in that case,” he said. “I doubt it will anymore. But it sure felt like it a month ago. There’s no value in gold right now.”
That hasn’t stopped some investors from pouring money into gold. The SPDR Gold Trust, the biggest exchange-traded fund for the metal, climbed to a record 770.6 tonnes on October 10. A one-ounce Krugerrand coin from South Africa cost almost $29 an ounce more than the spot price of gold October compared with a less- than-$5 premium at the start of the year.
Zuercher Kantonalbank, which manages about $107 billion in Zurich, said October 15 its gold vault was full after a surge in demand.
“The wonderful thing about gold is that you still have willing buyers,” said Paul Sutherland, CIO for Traverse City, Michigan-based Financial & Investment Management Group, which manages about $540 million and has 5 per cent of its assets in the metal. “One of the first things people will buy once they take their heads out of the foxhole is gold. It can take on a life of its own and go to $1,000, $2,000.”
Gold in New York was the sixth-best performer in the CRB Index. Nickel fell 54 per cent and oil dropped 29 per cent. Only sugar and cocoa are up for the year.
