James Moore: Why gold is not looking such a safe haven now


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It seems the modern-day gold rush could at last be coming to an end, at least for the moment. Long touted as a "safe haven in times of trouble" by excitable commentators who really ought to know better, the commodity has lost its lustre in recent weeks. The price has taken a steep dive and since hitting a record high on September 6 is off by fully 20 per cent.

It wasn't grizzled old prospectors with battered looking pans who joined the rush that has gathered momentum over the past four years as the gold price was chased higher and higher.

It was more to do with sharp-suited hedge fund managers together with quite a few middle-class people desperate to get on to what they thought was a hot investment tip.

It will be interesting to hear what those peddling gold-linked securities and even savings accounts to those middle-class people are saying to them now.

The reality is gold is anything but a safe haven. Like any commodity, it tends to be volatile. Unlike other commodities, however, it has status of an investment class as well as a raw material. Which means its price has quite a bit more speculative fuel available to heat the price than its peers. Fuel that has been withdrawn.

Gold is not so much a safe haven as it is a hedge against inflation and a weak dollar. Inflationary pressures in the US appear to be easing off and the dollar has been showing some strength. Despite the sour taste the Tea Party casts over US politics and its members' disgraceful behaviour in Congress, a lot of "safety money" has nonetheless been heading back to what has always really been its favourite place: the US dollar and US Treasuries (even if at the yield on them is pitiful).

Still, one side-benefit of gold's recent slide could be to slow the relentless and rather depressing rise of the sleazy gold-buying industry, driven by pawn shop chains.

Although, given how pawn shops have flourished in Britain during the recession, they might fancy chancing their arm at internationalising as the eurozone's politicians continue to wring their hands and duck difficult decisions, putting the whole world at risk of a second, and much deeper, downturn.

Interestingly, the precious metal's fall is as nothing compared to the hit that has been taken by its sister metal silver, which is off by nearly a half since the start of the year. Copper has also taken a nose dive.

The latter two metals tend to be more influenced by the economic outlook than gold is, given their use in a wide variety of industrial processes.

It's not as if there aren't enough prophets of doom out there, but the price decline is really rather worrying. It ought to concentrate minds.