Gold losing lustre, is no more safe haven as price not holding up

PETALING JAYA: Gold, which is seen as a safe haven in times of conflict or faltering stock markets, has been on the wane.

As at 5pm yesterday, spot gold had retreated some 14% to US$1,633.35 per ounce from its peak of US$1,900.20 per ounce last September, suggesting markets are not holding out for more quantitative easing (QE) from the US Federal Reserve (Fed) or other central banks.

Late last year, the European Central Bank embarked on the first of two funding operations to increase liquidity in the financial system and stave off a credit crunch, pumping in over one trillion euros of ultra-cheap three-year funds by the end of February.

Dubbed LTRO, or long-term refinancing operation, the funds were snapped up by some of Europe's biggest banks including Italy's UniCredit, France's BNP Paribas and Socit Gnrale, and La Caixa in Spain.

Despite that, gold has not tested US$1,900 per ounce levels since August and September, when a panic spawned by the eurozone debt crisis sent the precious metal to its record high.

Oversea-Chinese Banking Corp Ltd commodity analyst Barnabas Gan told StarBiz that gold had lost some of its lustre as a safe haven given the current risk in sentiments.

“The US dollar and Treasury bonds are currently our preferred safe havens to gold due to their relative price appreciation,” he said.

On chances that the Fed may announce further monetary easing after several closely-watched meetings, he said it was remote as the US government's Troubled Asset Relief Programme, a bailout programme launched in the wake of the 2008 financial crisis, was still ongoing.

Nonetheless, he does not discount the possibility for a new round of QE come June in spite of the lack of official hints, as a declining inflation rate and relatively high unemployment may give the US central bank “more ammunition” for QE3.

“Should our suspicion for the implementation of a QE3 this year come to pass, we expect gold to revert from a risky asset to a safe-haven asset and rally above US$1,800 per ounce by year-end,” he said.

Another analyst however opined that gold prices were entering a “critical area” and had the potential to be volatile.

Australia and New Zealand Banking Group Ltd senior commodities strategist Nick Trevethan said prices were forming a triangle formation and could find support at US$1,600 per ounce if it fell below US$1.630 per ounce.

But he added that gold prices had held steady, due in part to the move by central banks in emerging countries to increase their gold reserves to 15% from 5% over a 10-year period.

“There is some buying by central banks but not on a large scale. They buy when the price dips, which has helped to prop up prices,” he said.

He added that the Fed would set the direction tomorrow, and no mention of a QE would doubtlessly be received “badly” by gold markets, which typically rallied in anticipation of measures to boost liquidity.

“A QE would not be politically popular right now,” he said.