Daily Gold Update

Source: Marketwatch

San Francisco— Gold is often seen as an investment safe haven whose price tends to rise when the economy falls into troubles, but its recent slumps have defied conventional wisdom. Gold futures hit a historic high above $1,000 an ounce a few days after Bear Stearns was taken over by J.P. Morgan Chase & Co. on March 14. But in the recent round of crises triggered by the collapse of Lehman Brothers Holdings Inc., gold has fallen to below $700 for the first time in 13 months. The metal has so far lost more than $180 in October. The reason, according to analysts at the World Gold Council, is that the latest bout of the credit crisis has been deeper and more far reaching. Funds were forced to sell desired assets such as gold to meet margin calls, while weakness in European economies lifted the U.S. dollar, which then pushed dollar-denominated gold prices lower.

A stronger dollar reduced gold's appeal as an investment alternative. "Investors unwound leveraged short dollar, long gold positions, mindful of the long standing negative correlation between gold and the dollar," said the WGC's Dempster. Some analysts, however, said that in the long term, the U.S. rescue plans to inject liquidity into banks will stir inflation and a devaluation of the dollar — something that would be bullish for gold prices. "An extraordinary amount of liquidity has been pumped into the system this year," said Peter Grant, senior analyst at USAGOLD. "I anticipate further debasement of all currencies, including the dollar, which will ultimately drive gold prices higher." See full story.