London - Gold's toppling from record highs, culminating in
Monday's unprecedented $120 price plunge, has investors asking whether a
decade-long bull run is over.
History would suggest that while gold has taken a beating,
it is far from down and out.
Monday's tumble to around $1 535 an ounce dragged prices 20%
below the record $1 920 reached this month. But since its rise from just over
$250 in early 2001, gold has bounced back from bigger drops, having fallen 25%
between May and June 2006, and 27% in October 2008.
The 2008 episode saw gold treated like any other high risk
asset when the collapse of Lehman Brothers sparked heavy selling across
financial markets in a widely-documented "dash for cash" - after
which it bounced back hard to record highs.
"Gold and other real assets are not immune from global
selloffs, and this is a textbook example we are seeing now," said Bayram
Dincer, an analyst at LGT Capital Management.
"If you want to draw an analogy, look at 2008, when the
Lehman fall saw gold collapsing around $250. The markets are in this 2008,
global post-Lehman selloff mode."
In the short term, the sharply higher volatility in gold
typified by Monday's trade will have battered its already tarnished reputation
as a haven. Prices could have further to correct, given their hefty runup of
But expectations that in the longer term other asset classes
could prove still more of a risk - coupled with the low interest rate
environment - are likely to push prices higher when selling peters out.
While gold may be seen as less of a haven than in the days
before $50 daily price moves became a regular feature of the market, it is
hardly alone in seeing heightened volatility.
"Clearly any move like this is going to make people at
least question the assumptions they had that any eurozone stress might be
positive for gold," said David Jollie, an analyst at Mitsui Precious
Metals. "General financial market volatility is a threat to any
The euro, stock markets and raw materials such as oil and
copper have all posted losses this month as investors sold these nominally
riskier assets in response to growing concerns over the eurozone debt crisis.
Gold seemed to have reached a tipping point as worsening
financial market conditions forced some investors to realise fat profits in the
metal to cover losses elsewhere, and on a rush to the greater liquidity of the
dollar and Treasuries.
"For now, investors are only finding comfort in the
relative safety of cash," said UBS analyst Edel Tully.
These kinds of fears usually benefit gold, so its switch in
role from haven to source of funds shows not only how much stress the financial
markets are under, but also how overstretched the metal had become.
Signs that gold was ripe for a correction were rife after
its sharp rally to record highs in early September - which saw it surge by 28%
in just over two months - was followed by a period of intense volatility.
"The rise in volatility taking place in the gold price
was clearly an indication that gold was no longer a low-risk asset," said
Natixis analyst Nic Brown.
"We are unwinding much of recent move(s) over last two
to three months. It's too early to say whether it's the big burst. It could be,
but it's equally possible that it could be what allows the market to push over
further highs over the next few months."
Long-term investors hold on
Holdings of gold-backed exchange-traded funds have remained
relatively steady during recent selloffs, suggesting they have been reasonably
resilient to short-term moves.
Analysts say recent sharp price moves are a likely result of
repositioning by large institutional investors like hedge funds. But these are
not the only, or even the main, buyers of gold.
Small-scale retail investors, particularly Asian buyers
looking for a store of wealth and a hedge against inflation, have also been key
bullion buyers and are likely to remain so.
In the short term, investors are likely to be wary of
"catching a falling knife", and buying into the market before the
correction has fully run its course. But they may be swift to do so as prices
stabilise, analysts predicted.
While gold's retracement was sharp, spot prices are still up
7% this quarter, and nearly 14% on the year, despite the failure of a number of
key risk factors - like fears of a US default or fresh monetary easing - to
"In Q4 2008... the gold price fell by 25% over a fairly
short period," said VM Group analyst Carl Firman. "But it does tend
to recover at significantly higher levels.
"I think what you will see could be a gold recovery
very similar to the one you saw in Q1 2009, when the gold price recovered long
before other assets hit bottom.
"We are still looking at a high inflationary
environment, we are looking at negative real interest rates, there are all
sorts of uncertainties out there," he said. "That has got to benefit
gold, at some point."