Some outrageous claims have been made about the proper value for gold over the last couple of months. Producers have suggested gold should be as high as $2000/oz on the basis that it is a safe haven in times of trouble. Others have pointed to the cost of production at $550-600/oz to support a much lower price. Certainly though gold has taken a small fillip from the current Israeli invasion of the Gaza Strip, the reality is gold has largely stood on the sidelines during the last 3-4 months of market turmoil. It has neither sold off like other commodities or been the investment of first resort in troubled times that its supporters would have us believe.
An interesting article in Seeking Alpha suggests that the price has been depressed by a combination of falling demand in the India for jewelry combined with a significant increase in sales for recycling due to hard pressed low income consumers turning gold holdings into cash. Figures are reported from the Bombay Bullion Association of an 81% year over year fall in imports from December 2007 to December 2008. In the meantime, gold imports have fallen 47% over the same time period. India is the world’s largest importer of gold for jewelry. The same article suggests Chinese sales will also show a sharp decline although anecdotal comments added by commentators suggest the early January Beijing gold market got off to a roaring start.
Gold is more often a haven in times of inflation and arguably benefited a year ago from a general fear that inflation would take hold driven by rising commodity costs across the board. With the markets now focused on deflation more than inflation it doesn’t seem credible that gold will be a great beneficiary of the current uncertainty.