Gold: Risky Play or Safe Bet?

A number of factors, real or imagined, combined to move the gold price down to touch a two-week low at $1087.70 an ounce early Thursday and then back up to nearly the $1110 level in a matter of hours.

Movements in the gold market are becoming less and less predictable as the “Great Recession” continues to alter how we look at global economics, currency markets and attitudes toward risk. The traditional thought no longer seems to apply in many aspects of our current situation.

Amongst the factors for today’s downward price actions are: a stronger dollar brought on by worries over Greece’s sovereign debt issues; and dampened risk appetite partly due to worse-than-expected weekly jobless claims sparking fears the economy is recovering much more slowly or not at all.

Factors pushing gold up later in the day involve sketchy rumours China may be seeking to purchase 191.3 tonnes of gold from the IMF and technical buying as some traders seek to cover short positions.

The factors limiting gold seem much stronger and likely to continue placing downward pressure. But, these factors have a lot to do with fear of another financial crisis bringing us back into the doldrums of 2008. And isn’t gold supposed to be a safe haven investors turn to in unstable times like these?

Gold: Risk Play or Safe Haven Asset?

Historically, gold has held the distinction of being a safe haven asset. A knight in shining armor fearful investors turn to in times of financial crisis; the one tangible thing that manages to hold its value.

However, investors looking for a safe place to secure their capital are now turning to the US dollar instead of gold, which is now lumped with riskier holdings such as higher-yielding currencies, commodities and equities.

According to Dow Jones Newswires’ Matt Whittaker, this shift in perception “has come about in part because ultralow interest rates have helped spark investor buying in the metal.”

Fortunately, Whittaker points out in a later post, “the safety allure of gold isn’t totally tarnished.” At least not in Europe where investors are concerned Greece’s financial woes, as well as those of other EU nations, may deepen. “The metal has recently hit a record high in euros.”

On Thursday, the European Commission reported that economic sentiment in the eurozone dropped for the first time in nearly a year. Business investment has also fell 5.8 per cent in the fourth quarter in the U.K. In regards to Greece’s problems, Standard & Poor’s has issued a warning that the nation is in danger of earning a junk status credit rating. Moody’s Investors Service has said it also may cut the country’s debt rating if it doesn’t take more aggressive actions to cut its deficit.

Price Forecasts

From Bears to Bulls, the web is afire with gold price predictions. Depending where you fall on the gold investor spectrum, there’s a forecast that fits you.

For my Down to Earth Bear Friends, analysts at Bullion Desk see gold “looking vulnerable to a deeper correction” and “expect dips to continue to draw investment support on inflation or deflation concerns and Greek downgrade or default worries with gold holding in a broad band between $1,074 and $1,130.”

For my Overly Optimistic Bull Pals, analyst, trader and editor of the Market Oracle Nadeem Walayat says gold prices will reach $1350 later in 2010 before pushing as high as $2,000 an ounce.