Sunday, November 20, 2011

Gold’s Safe Haven Status in Question After 3.5% Sell-Off This Week

Despite its reputation as a safe place to hide from the chaos roiling global markets, gold has hardly been a bastion of strength. The yellow metal suffered a tough week falling 3.5% to close out at $1,725.10 an ounce. The price tumbled 3% on Thursday alone, actually outpacing the decline in U.S. stocks. For a traditional safe haven, the recent action has been concerning for those invested in the precious metal.

The question on the minds of gold bugs everywhere is whether this a flashing yellow light or another chance to buy the dip?

"Gold is being a save haven," insists Alix Steel, crack reporter for The metal is "going down less than the rest of the market; this is exactly what we saw in 2008," she says. During the financial crisis gold fell 20% in a few weeks then rallied up 40% for the year. Steel, who always comes prepared, also cites the following:

*ETF Demand was up 58% in Q3, despite the well-publicized selling by struggling hedge fund manager John Paulson

*Total gold investment was up 6%

*Demand for gold bars and coins rose 29%

*Central banks bought over 140 tons during Q3

The last point is critical as central bank buying around the world has been a pillar of the bullish gold case throughout the entire rally.

Steel says she hasn't heard any indications from her impressive list of sources that Emerging market central banks are doing any selling. Not only that but total buying could be as high as 450 tons for the year compared to net selling just three years ago.

Steel's conclusion is that adding gold to your holdings prudently is still a good idea provided buyers don't get too rattled by likely volatility. "Keep in mind when stocks get pummeled, commodities get pummeled, and gold will get hurt along the way," she says. But the bet is that gold just won't stay down as long.

Steel says the miners are also picking up steam lately. She points specifically to Randgold (GOLD), a stock showing strength despite the fact that the company missed Q3 earnings estimates in almost every way a company can possibly disappoint. She also likes Newmont Mining (NEM) despite dropping production because of the company's "juicy sexy dividend."

Regardless of my respect for Steel, not all the dividends nor earnings misses in a row could get me to make a bullish case for mining stocks. Gold will never change. Indeed, not changing is much of the investment thesis for gold. The miners are run by people who tend to screw up at inconvenient times.
Are you buying the metals, the miners, or staying away from both?

Let us know in the comment section below.

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