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Thursday, May 31, 2012 12:59:26 PM
By Nin-Hai Tseng,
May 31, 2012: 11:41 AM ET
This year, gold is seeing its worst performance since the 2008 financial crisis, but certain catalysts may reverse its course in the coming months.
FORTUNE -- Investors have long found safety in gold, but the precious metal has been losing luster as Europe's ongoing debt crisis intensifies. As of Thursday morning, gold was down 7% this month, at $1,560.90 an ounce.
This isn't the first time gold has fallen when markets turn shaky. During the depths of the global financial crisis, the metal dropped by 20%. A few factors drove the decline: As the U.S. financial system nearly collapsed, investors took their money out of stocks and poured them into U.S. Treasuries. And institutional investors, faced with losses on U.S. investments, liquidated overseas assets to meet margin calls or broker agreements. Finally, as banks clamped down on lending, money became scarce.
All that helped drive up the value of the greenback. Because gold is priced in dollars, the currency's decline typically leads to a rise in the metal's value because gold becomes more expensive for buyers who hold other currencies. And vice versa.
In recent months, the rapidly rising dollar against the euro has brought down gold. As the euro zone crisis turns from bad to worse with Greece's possible exit from the monetary union, investors have been leaving the euro and flocking to safety in Treasuries and German bunds. On Wednesday, the euro fell to its weakest level against the dollar in almost two years after Egan-Jones Ratings cut Spain's credit rating for the third time in less than a month.
But pressure on gold could ease up some. For the past year, it has been entangled in the world's biggest fiscal woes, says James Steel, chief commodities analyst at HSBC Securities. While Europe's financial mess has driven gold downward, America's debt problems have helped boost gold to record highs. It soared past $1,900 an ounce by last September, shortly after the U.S. suffered its first-ever debt downgrade as Congress stalled on talks to reduce the national deficit.
If the past repeats itself, gold could see a rebound later this year. Lawmakers are expected to scramble once again on a deficit reduction plan or else trillions of dollars in looming tax hikes and spending cuts will automatically kick in. The Congressional Budget Office has warned the economy could contract by 1.3% during the first half of 2013. These issues threaten to cast a shadow over equities and other financial assets, and push investors into bullion.
For at least the next several months, gold will surely be caught in the middle of the world's big debt fiascos.
http://finance.fortune.cnn.com/2012/05/31/gold-prices/?iid=HP_LN
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