Why Isn't the Market Seeking Safety in Gold?

The S&P 500, Dow Jones Industrial Average and Nasdaq indexes have all dropped, on average, 33% since September. But investors aren’t moving to typical safe havens.

Rates on Treasury bonds, for example, were actually rising until early November.

Gold is often bought to hedge against the market, too, but not right now. It’s been remarkably tame considering the market’s movements. Since September, volatility, as measured by the CBOE Volatility Index, has spiked over 200%.

During that same period, gold moved up, but came right back down to its starting point - around $750 an ounce.

So why isn’t the market bidding up gold in a flight to safety?

The market is expecting a turnaround. Even as the markets tank, Wall Street is looking for things to change course. It’s betting that gold and Treasuries won’t do as well as stocks.

The subtext is pretty clear: With the price of equities at historic lows, we’re looking at a tremendous opportunity.

Unfortunately, very few investors have large pools of capital sitting on the sidelines. And that may be the biggest obstacle to a significant turnaround. The question then becomes, if a turnaround takes longer to materialize than Wall Street expects, how much lower can the market go?

Comments

[Wesley Mouch:]

I think that a discussion as to why investor's aren't running to gold needs to acknowledge the general loss of value of nearly all asset classes. Why not sit in treasuries paying a yield until some stabilization in asset prices is found? Commodity prices will return, IMHO, but not yet. No point in being the first to the party before the punch bowl has been completely spiked by the Fed (monetization of the debt).

2008 Dec 07 01:40 PM

[Pipo:]

Freeport McMoran CEO spoke about the Gold market in a very good video interview:

ceotalk.blogspot.com/2...

2008 Dec 07 01:51 PM

[User 163784:]

I share the confusion about Gold not rising. I in fact, have tons of capital on the sidelines and don't know what to do with it. I have watched my Franklin Templeton, Evergreen, and Eaton Vance mutual funds tank. My Calamos balanced fund and John Hancock funds have fallen. My shares in Washington Mutual and LandAmerica have gone to zero. My Oil Calls and Dry Ships shares have fallen to below commission price to sell them.

Please tell me Gold or something else is worth buying. I am on the verge of considering high mileage sports cars at this point.

I have more cash in my checking account than in all my investments put together. At this point I would be willing to pay 50% commission for a winning trade.

Thanks

2008 Dec 07 11:49 PM

[Bill Zielinski:]

Great comment by User. Every asset class except government paper has been vaporized.

I am thinking that the incredibly bad economic news has already been somewhat priced into the markets. Given the effective zero return on short term treasuries and not much more on the long end, it's time to start deploying capital into the asset classes that have taken the biggest hits?

Gold is a total enigma. Huge physical demand but the price does not go up. It is assumed that "quantitative easing" will be employed by central banks worldwide yet gold does not skyrocket. I am guessing that we will have a delayed reaction to the upside in the gold markets.

2008 Dec 08 01:03 AM

[Vox Rationalis:]

Come on, U, why don't you answer your own question? Why Isn't the Market Seeking Safety in Gold? You say "The market is expecting a turnaround...It’s betting that gold and Treasuries won’t do as well as stocks." Well then, why aren't gold and Treasuries moving in tandem? Why do Treasuries continue to be so strong?

2008 Dec 08 08:12 AM

[jdeman:]

Maybe because everybody acknowledges that the political will to relay on gold to reorder the mess does not exist on the realm of real politics. Additionally, I have heard several quotations talking about locking money to energy. It is like if everybody is looking for ways to avoid returning to gold. And the market knows it.

2008 Dec 08 12:13 PM

[CLH:]

The answer is simple. We are in deflation and regardless of the myth that gold will go up whan the dollar goes up---it never happens.

2008 Dec 08 01:09 PM

[Fabien Hug:]

I'd like to be like userxxxxx having so much cash, not to know what to do with it, after beeing wiped out ....
You could buy anything, diversify (PM, corp. bonds, dividend stocks, even your bad MF) and wait. It will beat cash and you won't have to pay 50% commission.

2008 Dec 09 05:04 PM

[Ahab:]

The market is seeking safety in gold. All over the world investors are paying substantial premiums over Comex to own the real thing. Demand has been soaring. On the other side of the coin leveraged funds are puking up everything they can turn into cash to make margin calls and cover their cds and other big time losing trades.
The fed needs an exponential number of bunnies to fund an exponential bailout/deficit. Where will they be if gold takes off now and who are the two big comex shorts for the 'million dollar question'?

2008 Dec 10 03:32 AM