DJ Forex View: Safe Haven Changes Colors, From Green To Gold
FutureSource.com
Date: September 11, 2007
The dollar is starting to resemble fool's gold for investors wanting a safe place in troubled times, and that's leading shelter-seekers to just buy the real thing.
The price for gold - the ultimate security blanket since the Egyptians began mining for its thousands of years ago - has been surging in recent days as worries of a slowdown in the U.S. economy and the global short-term liquidity crunch continue to rattle stock markets....
"The dollar appears to have lost its safe-haven allure, allowing gold to benefit from a rise in risk aversion and weakness in equities," said Stephen Malyon, currency strategist at Scotia Capital in Toronto....
But now that the U.S. housing and subprime-mortgage related debacle is starting to spread to the broader economy - as seen by a report Friday showing a drop in job creation for the first time in four years - the dollar doesn't look so hot.
Making matters worse for the dollar and perhaps good for gold, any action by the Federal Reserve to turn things around - interest rate cuts or cash injections into the financial system to keep markets flush with liquidity - will also turn investors away from the dollar.
Lower interest rates would mean investors get paid less for holding dollar-based assets, so many would likely turn to other currencies that pay higher returns.
And cash injections by the Fed is inflationary by nature, which also tends to make the dollar less attractive because investors' buying power diminishes with each passing day.
Gold, meanwhile, is seen as the perfect hedge against inflation."There is an increasing clarity about the weakness in the U.S. economy, so it is becoming a logical conclusion for people to put their money in gold,"; said Ashraf Laidi, chief foreign exchange analyst at CMC Markets in New York. "It's also clear that this scenario will weigh on the dollar.";
Gold: Accepted Everywhere
...But some of the big brains in global economics in modern times still sing gold's praises.
While Alan Greenspan was the Fed chief in 1999, he argued against calls by U.S. legislators to get rid of the U.S. Treasury's gold holdings.
"Fiat money paper in extremis is accepted by nobody, and gold is always accepted and is the ultimate means of payment,"; the former Fed chairman said on Capitol Hill. "Gold still represents the ultimate form of payment in the world.";
Making the shiny nuggets even more popular for today's investor is the convenience with which it can be bought and sold....
But some analysts warn that gold prices are already overblown, in part due to a flurry of interest from short-term investors out to make a quick buck, and say the price increases might not last....
And Henrik Gullberg, currency strategist at Calyon Corporate and Investment Bank in London, says that the dollar might yet strengthen if a weak U.S. economy is not contained within the 50 states, and translates into a global slowdown.
"If you have a weak U.S. economy, a possible recession, that spills over and causes negative global implications, then you have risk aversion that would help the dollar,"; Gullberg said.
And that possible interest in the greenback could turn investors off on gold.
The above information is as it originally appeared on FutureSource.com on September 11, 2007.
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