Interpac Business and Migration Solutions Melbourne Australia

(September 26,2011)

The safe haven status of gold has been shattered.

Not so safe haven, after all.

In recent months, the price of gold has rocketed towards the $US2000-an-ounce mark as investors bet the decade-long run-up in the value of the yellow metal had some way to go. All that debt in Europe and the US must only add to the inflationary pressures that make so-called stores of value like gold so attractive, or so the conventional wisdom went.

In the space of a couple of weeks, though, another market certainty has been sunk. Gold, silver and other precious metals have seen their prices smashed, as rumours of a shift to selling by a handful of funds help prompt an actual stampede.

Gold, which ended last week with its biggest two-day plunge since 1983, has dived further today, losing another 7.5 per cent, or about US124 an ounce, to as low as $US1532.72 in spot trading.

Silver fared even worse, sinking another 18 per cent, or $US5.61, to drop to $US26.07. Today's tailspin adds to silver's 18 per cent drop on Friday, then the biggest one-day dive for the metal since at least 1979, according to Bloomberg data.

The jolts for the gold and silver bulls come as little has improved in the basic economic issues that had previously driven prices of the metals to record levels. Gold, for instance, peaked at $US1921.15 on September 6 as investors bet the flood of debt and the danger of sovereign defaults left few other safe places to park money.

US appeal

Those issues haven't abated - in fact, have become worse - but what's changed is that US assets, particularly the greenback and US treasuries have suddenly become more appealing. The rising US dollar alone has helped push US-dollar-denominated commodities lower.

"Support for the US dollar has promoted natural weakness across the commodity space with the safety of gold not even immune to the decidedly risk-off atmosphere," said Go Markets currency analyst Christopher Gore.

As sentiment shifted, though, investors have jumped on a bandwagon - selling off commodities - that's gaining momentum if anything.

ANZ Bank commodity analyst Natalie Robertson said gold had suffered because of the volatility of its prices through August and September and more archane issues, such as changes for metals investors announced by the Chicago Mercantile Exchange on Friday.

In perhaps a symptom of gold's rising popularity, the CME lifted the minimum requirements of investors trading in gold on the market.

The decision by the CME caused "a whole heap of forced-selling," said IG Markets analyst Ben Potter.

Aussie loses friends

"The heightened risk aversion is actually being reserved for the ultimate safe haven of US treasuries and cash rather than gold," said Ms Robertson.

The jump to US debt is coming despite the downgrade of its top rating by Standard & Poor's in August. Even comments by the US Federal Reserve last week that the global economy was worsening hasn't put investors off buying US assets - partly because most other assets have become even more unattractive.

These assets include the currency market's favourite until recently: the Australian dollar. The Aussie dollar has lost another US cent to drop to 96.3 US cents - a fresh nine-month low today.

Investors in Australian mining stocks have also been pummelled with the ASX sub-group of gold miners dropping almost 10 per cent. Newcrest lost 8.5 per cent to $32.86, making it the largest single drag on the ASX200 benchmark share index.

ANZ's Ms Robertson chalked up the falls in gold prices to a short-term factors that may soon tempt investors back into the precious metals.

"These falls are the result in a shift in sentiment rather than a shift in fundamentals and should represent very attractive buying opportunities," Ms Robertson said. "Certainly a lot of speculators have been washed out the market and once prices do start to bottom, things should bounce quite hard."

Mr Potter agrees that the forces making gold an attractive investment have not been dimmed by the short-term falls.

"The fundamentals that gold has been rising on are still firmly in place," said Mr Potter.

In perhaps unfortunate timing, an Australian-based exchange for precious metals will begin operating month, allowing buyers and sellers to trade online as well as offering storage in its Brisbane vault.

The Australian Bullion Exchange, scheduled to open on October 24, will cater for trade in investment-grade gold, silver and platinum, the company said. Let's hope there are some buyers around when it opens for business.