Gold has lost its shine during economic crisis

By The Associated Press

Published: November 4, 2008

NEW YORK — For years, investors known as gold bugs snapped up the metal and socked it away, betting that a colossal economic crisis would one day slam financial markets and send gold prices right through the roof.

For many investors, that grim scenario is in full swing, except for one thing: After briefly hitting $1,000 an ounce for the first time in March, gold has fallen into a rut and shows no sign of budging anytime soon.

Gold’s failure to flourish despite broad financial carnage has disappointed many of the metal’s champions. Others say it’s simply in a lull and is ripe for another big surge. But most gold buyers agree that the metal’s lackluster performance lately has been surprising.

"It’s been a puzzle for most of us,” said Geoff Farnham of Venice, Calif., who inherited some gold holdings and recently began buying gold coins as "insurance.”

"In hard times, gold is a good thing to have,” the retired software developer said. "Knowing that there aren’t a lot of gold coins out there to buy, seeing the price continue to drop has been curious.”

It’s also been punishing for investment portfolios. Since soaring to an all-time high of $1,033.39 an ounce on March 17, gold plummeted 30 percent. Gold on Monday rose $8.60 to settle at $726.80 — roughly the same level where it traded a year ago.

‘Collateral damage’

So what happened? As the financial crisis pummelsmarkets around the globe, hedge funds and other large investors who drove gold to dizzying heights earlier this year are now racing to unwind those positions to raise cash and cover huge losses. The massive deleveraging has pounded other commodities from crude oil to corn to copper.

"Gold is being pulled down by indiscriminate selling of virtually every asset,” said Jeffrey Nichols, managing director at New York-based American Precious Metals Advisors. "You could call it collateral damage.”

Instead of gold, investors are pouring money into the newest safe-haven asset: cash.

That has pushed the dollar to multiyear highs against the euro and the pound, hurting demand among investors who buy the metal as an inflation safe-haven.

Gold analysts say it’s unclear how the metal will respond to deflation.

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