Gold: A Safe Haven


"By Q3, the crisis had become so deep and so far reaching that there were only a handful of assets that could be sold at a meaningful value. . .gold was one of them."

The gold price rose for the eighth consecutive year in 2008, amid one of the most tumultuous years in financial markets since the Great Depression. Gold ended the year at US$869.75/oz, on the London PM fix, $36/oz higher than end-2007, while the average gold price rose by $175.33/oz to US$871.85/oz. Gold's performance is especially impressive considering the massive wealth destruction that took place elsewhere in financial markets. Global equities and many commodities, for example, lost approximately half their value over the course of last year.

The gold price reached a new record in the first quarter of the year, of US$1011/oz on 17 March, on the London PM fix, driven by safe-haven inflows in the run up to the Bear Stearns crisis. It tested this record again in the third quarter, trading as high as US$986/oz on 15 July, the day after the U.S. Treasury and Federal Reserve Bank announced plans for a joint bailout of mortgage giants Fannie Mae and Freddie Mac. The gold price traded lower for the next two months, before spiking back up to $905/oz on 29 September, the day the U.S. House of Representatives rejected a US$700 billion rescue plan for the U.S. financial system. This followed two weeks of disastrous news from the financial sector, with Lehman Brothers, Merrill Lynch, AIG and Washington Mutual all announcing that they could no longer function in the current credit environment.

After a brief pull back, gold spiked back to US$903.50/oz on 8 October, as six of the world's leading central banks made an unprecedented coordinated emergency cut in interest rates, in a clear signal of just how bad financial and economic conditions had become. This was followed by a sharp selloff, taking the gold price to an annual low of US$712.50/oz on 24 October. However, gold ended the year on a firm footing, rallying by around $150/oz in the final two months of the year, to close at US$869.75.oz, up 4% from end-2007, on the London PM fix.

Gold's price performance is especially impressive when juxtaposed against other commodities. Of the 17 commodities that we regularly monitor, gold was the only one to increase in price last year. The sharpest declines were posted in lead, nickel, copper and oil, which fell by 63%, 58%, 57% and 56%, respectively. Each of the other precious metals also fell sharply (silver 27%, palladium 49% and platinum 39%).

Gold's relatively muted performance in Q3 compared with the first half of the year was, in part, symptomatic of the severity of the financial crisis. By Q3, the crisis had become so deep and so far reaching that there were only a handful of assets that could be sold at a meaningful value, in order to raise cash to cover margin calls on other assets; gold was one of them.

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