Gold: a safe haven

Even though gold prices have declined by 10 percent in three days; their biggest three-day drop in 28 years, the precious metal may well still be the safest bet in the world. Leading economists believe that there are three main culprits in bringing down gold prices: hedge funds which have had large long positions in gold, the increase in margin requirements in commodity exchanges and investors unusual response to meeting liquidity requirements. Market participants believe that hedge funds are selling gold to meet their margin calls; which are common in turbulent markets. While equities and other commodities are not very attractive given the chronic slowdown in the global economy; gold is glittering, since it is best to sell winners before losers. Chicago Mercantile Exchange (CME) increased its margin requirement for gold by 21 percent, silver by 16 percent and copper by 18 percent. High volatility has forced the exchanges in America to increase margin requirements; thus raising the liquidity requirements for investors. In turn, investors have had to raise funds by selling gold. The decrease in gold price during times of high uncertainty in international markets is unusual. Usually gold prices are expected to increase as gold is considered a safe haven during times of uncertainty, but investors treated gold like any other commodity and overlooked gold as a safe haven in the midst of the worsening Euro zone crises. This also raised a debate as to whether gold is a safe haven in the long-run or not. But there appears consensus, for now; that this unusual decrease in gold price is just a temporary phenomenon and gold prices would increase in coming years as the euro zone crises, which pulled the price above $1900 an ounce this year, is expected to escalate. A recent poll conducted at the London Bullion Markets Associations annual conference shows that gold is expected to go beyond $2000 due to the volatile macroeconomic climate, mounting fears of global recession and worsening Greek debt crisis.