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Gold disappoints as safe haven

By James Clapton

LONDON, November 16, 2008 – Gold has failed to deliver as a safe-haven investment. Even though we are now living through the world’s worst financial crisis in 80 years, gold has lost 5 percent of its value since the collapse of Lehman Brothers in September – and 15 percent over the last month.

Gold traditionally has been seen as a safe haven investment in tough times. With asset prices from shares to houses slumping in value, gold might be considered as an appealing alternative investment.

However, the strengthening of the U.S. dollar as the financial crisis has dragged on, has eroded gold’s investment appeal, as gold is denominated in dollars. For those holding euros or rupees (India is the world’s biggest gold consumer), it is more expensive in dollar terms to buy gold as the dollar strengthens. For those holding sterling, the outlook is even worse as the pound has fallen to a 12-year low against a basket of currencies and looks likely to fall further as UK interest rates seem headed further south.

Also, as the oil price has sunk to below $60 a barrel, inflationary fears are easing, reducing gold’s allure as a safe haven store of value.

Demand for jewellery has also fallen in response to the surge in gold prices earlier this year.

Gold hit an all-time high of $1,030.80 an ounce in March, but had dropped back to $724.60 on Friday November 14.

The immediate outlook for gold as a safe haven would appear to disappoint further, as the dollar has now become an important refuge for fund flows in these uncertain times; and growing fears of a global recession signal lower demand for oil, and lower oil prices; and jewellery demand risks downward pressure as economic conditions deteriorate.