PENNY WATCH

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EMLL - Gold regains safe-haven status on U.S. downgrade

By Tatyana Shumsky
NEW YORK (MarketWatch) -- After last week's slip, gold reclaimed its title as the ultimate safe haven.

Gold got caught in a market-wide downdraft Thursday, as investors sold profitable gold holdings to cover losses in other assets, giving the precious metal a black eye. But Standard & Poor's decision late Friday to cut the U.S. government's credit rating restored gold's reputation as a haven whose risk profile is unblemished by political wrangling, excessive debt or central-bank interventions.

S&P's move helped propel gold futures to a record of $1,718.50 a troy ounce Monday, up more than $60 from Thursday's settlement. The contract for August delivery settled up $61.40, or 3.7%, at $1,710.20 a troy ounce on the Comex division of the New York Mercantile Exchange.

The sharpest gains came as equity markets faltered, with gold spiking to record levels in electronic trading moments after the Dow Jones Industrial Average touched the day's lows.

Gold has held up as a bastion of safety this year, gaining more than 20% while stocks are deep in correction territory. And such protection is in high demand amid an uncertain economic outlook for the U.S. and globally and a strained European sovereign-debt market.

"You're going to see additional allocation to gold as the fiscal problems in developed countries that led to [recent market declines] are not going away anytime soon," said Ross Koestrich, iShares Global Chief Investment Strategist at BlackRock. "It is one of the few safe-haven assets left."

Other refuge assets also rallied, with investors diverting their wealth to the Swiss franc and the Japanese yen. However, these traditional haven currencies bring the added risk of government intervention, making them flawed alternatives to gold.

Last week, Japan's central bank sold massive amounts of yen to cool its rising exchange rate while Swiss authorities slashed their key interest rate to zero to discourage investors from holding the franc. The frequency and scope of such intervention is likely to increase in the coming months as governments of stable economies stave off artificial inflation of their exchange rates.

Even U.S. Treasury bonds gained ground Monday, because "gold can't replace Treasurys because there's simply not enough of it," Koestrich said. For 70 years, U.S. Treasury debt has been synonymous with "risk-free" assets, a classification that helped Treasurys become the most liquid and widely held government debt in the world.

Gold's allure, lies in the fact that governments can't slash its price by making it more abundant--a fear that continues to dog paper currencies including the euro.

The European Central Bank said it will buy the government bonds of Italy and Spain to bolster the debt markets of these euro-zone economies. Yields on both Italian and Spanish bonds have surged in recent days as mounting concerns that these countries won't be able to pay their bills sparked heavy selling pressure.

But market participants are now concerned that the ECB will expand the money supply to pay for these purchases. This so-called monetization of debt is likely to erode the value of the euro and cast fresh doubts on the strength of paper currencies.

"Since gold is the most liquid of the hard assets, gold seems to benefit the most," said Tom Pawlicki, a precious metals analyst with MF Global.

The flight to safety is likely to boost the amount of physical gold held by exchange-traded funds.

Gold held by two U.S.-listed ETFs, Gold Shares (xx) and the (xx), totaled a record 1,447 metric tons Friday, up 8% from 1,339 metric tons in mid-July, Pawlicki said.

Mining stocks are also likely to see added investor interest. The stocks of gold miners have struggled to keep up with gold prices for the past year as higher energy prices and other input costs pressured profit margins, but recent declines in oil prices are likely to reverse this trend.

"On days when you have the S&P 500 down 200 points these stocks are not going to outperform the commodity, but as gold goes up and oil and input prices go down," the situation will shift to favor the mining companies, said Mark Johnson, co-manager of the $2.2 billion USAA Precious Metals and Minerals Fund (USAGX).

Gold's ride higher is unlikely to end soon as two investment banks, J.P. Morgan Chase & Co. (JPM) and Goldman Sachs Group (GS), raised their gold-price forecasts Monday. J.P. Morgan now sees gold prices at $2,500 a troy ounce by year-end, while Goldman expects gold at $1,730 in six months.

http://www.marketwatch.com/story/gold-regains-safe-haven-status-on-us-downgrade-2011-08-08