Whither gold? Russia is imploding, Asia has been declining for months and yet gold -- and gold stocks -- continue to falter. Around 3 p.m. EDT, the price of gold was down $5.30 an ounce to $280.60 and gold stocks were falling in tandem; the American Stock Exchange Gold Bugs Index was down 5.9%.
No less an authority than
included a rise in the price of gold on his
checklist of signs the market has bottomed. Yet here we are with Russian President
apparently about to be out of a job and speculation rife about who (or what) will replace him, and gold is down. If Mr. Kansas is right, be afraid. Be very afraid.
But despite perceptions to the contrary, gold hasn't shined (sorry) as a safety valve for investors in times of strife for some time. So perhaps it's a mistake to look to gold for signals fear has reached climactic levels. "The financial environment is much different than it was 20 years ago," said David Rinehimer, director of futures research at
Salomon Smith Barney
. "Recently there really hasn't been much flight to gold during these periods of turmoil in the financial markets or heightened political uncertainties. Whether it's the Gulf War or the retaliation for the striking of the embassies, there doesn't seem to be the demand for gold as a store of value. There seems to be more speculative selling of gold rather than investment buying."
The big change since gold's heyday is the proliferation of alternatives into which global investors can move capital during uncertain times, Rinehimer said. Additionally, with the threat of deflation being more pronounced at present than that of inflation, the attractiveness of gold and other hard assets wanes.
"Gold is basically trading more like a commodity than a financial asset, that's the bottom line," he said. "With so many alternatives in the global marketplace for money to go into that offer some sort of return, in contrast to gold that offers none, there still appears to be more
of a shift within different groups in financial assets rather than hard assets like gold. It seems to me the movement of capital, recently anyway, has been to dollar-based fixed-income assets."
The political developments in Russia are "not a major factor by any stretch" in the direction of gold prices, according to Clarence Morrison, senior metals analyst at
. He agreed with Rinehimer and said "you can't classify
gold as being a safe haven."
There are two "dominant factors" affecting the price of gold these days, Morrison said. First, the strength of the dollar vs. other currencies -- most notably the Japanese yen, the South African rand and the Australian dollar -- has elicited fear of selling by central banks of those countries to support their respective currencies. Additionally, the weakness in Japan and other Asian countries has raised concern about purchasing power and demand for gold in that region, the analyst said.
Further, the market remains worried about the gold reserve policy of the national central banks of Europe after they join the
European Monetary Union
. In July, the
European Central Bank
announced it will use a 15% holding of gold in its future reserves but uncertainties remain about how much control the European Central Bank will have over the policies of national central banks in countries like Austria and Portugal.
"These factors may not only cap the upside of the metal's price, but also exacerbate speculative activities by investment or hedge funds and producers' hedging," Morrison wrote in a recent research report. "However, we believe that the gold price may find some support at $280 per ounce and fluctuate between $280 and $305 per ounce over the next few months."
Morrison currently maintains a hold rating on gold stocks, but he said firms such as
represent attractive "trading vehicles" with 5% to 15% upside potential. He does not currently recommend them as long-term investments, however.
Hardly a rousing endorsement of a commodity that even during this period of global turmoil shows little sign of regaining (we couldn't resist) its lost luster.