Gold isn't behaving like a safe haven should. While investors have endured torrid times as global equity markets have slumped, even worse tribulations may be required for the precious metal to regain its past lustre as a safe haven.
Its price is down more than three per cent since November 2015, even as the S&P 500 Index has declined eight per cent. And on January 20, when a global equity rout pushed the MSCI World equity index down more than three per cent, gold's rebound fell almost $3 short of highs set earlier in the month.
There are good reasons why investor panic is not translating into a bigger bounce in gold.
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Asian demand for the metal is also expected to be dented. Chinese retail investors, who tend to buy gold speculatively, have been burnt by domestic stock market gyrations and may be more cautious as domestic growth slows. Investors have no interest in buying it as a hedge against inflation in the western world, and in any case, any pickup in inflation would signal stronger economic activity and spur investors to buy riskier assets than gold.
Another problem is that the metal has become a slightly less trustworthy safe haven. The past decade saw a surge in exchange-traded funds that track gold. This sort of more speculative investor demand nearly tripled to almost a quarter of the market after the financial crisis, according to Natixis analysts. Such buyers are quicker to bail than those who want to hold the metal in physical form, making prices more volatile.
Gold probably still remains the safe haven of last resort. If there were a real financial meltdown - or a sharp reversal in the dollar's fortunes - it may regain its shine. That will take grimmer news than the markets have yet had to face.
