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 percent, on Wednesday to finish at US$1,757 per ounce. That was the biggest percentage drop in nearly three 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 on Wednesday came on news that orders for long-lasting manufactured goods rose 4 percent last month, 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 on Wednesday, exchange operator CME Group Inc announced it was raising its futures margins for a second time this month, prompting some investors to sell the metal.
Bullion for immediate delivery dropped as much as 1.7 percent to US$1,729.45 an ounce and traded at US$1,742.38 at 2:43pm in Singapore. The metal slumped on Wednesday as better-than-estimated US economic data boosted the US dollar and cut demand for safe assets before central bankers from around the world gather today for an annual meeting.
Gold has dropped 8.9 percent from its record US$1,913.50 on Tuesday in “a correction that we have to have,” said Justin Smirk, senior economist at Westpac Institutional Bank, a unit of Australia’s Westpac Banking Corp. “Near-term there’s still a lot of reasons for gold to outperform other commodities because we don’t think that problems are being resolved.”
Gold is in the 11th year of a bull market and has gained 22 percent this year as investors seek to diversify their holdings away from equities and some currencies. The metal is still up 6.3 percent this month, heading for its second monthly increase.
Helping push the gold price higher recently have been big price swings in the stock market. Frightened investors have been shifting money into assets that seem less volatile, like US Treasury bonds and gold.
However, 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 does not pay interest like a bond or represent a share of a company like a stock. It is only worth what people believe it is worth, and that means that prices can rise and fall based on emotion.
“People could start thinking gold is much more risky than thought,” Ciner said. He thinks gold is in a “bubble.”
Monty Guild, chief investment officer of money manager Guild Investment Management, is still bullish, though he recently sold some of his gold holdings.
“It went up too far, too fast,” Guild said, before adding that he may buy again soon now that the price has dropped. “I think it could eventually go to US$2,200.”