London, 14 October 2011

ETF Securities published a research note today looking at the recent sharp gold price correction and whether it marks an end to gold's perceived status as a "safe haven" asset.  In the note ETF Securities looks at what is behind the recent gold price correction in the context of previous risk asset corrections and assesses the medium term outlook for the gold price.

Key findings from ETF Securities' research report include: The September gold price correction resembles the de-leveraging phase of the 2008 credit crisis. In 2008 the gold price fell 38% between July and October as investors initially took profits on their gold positions to cover liquidity needs elsewhere. The gold price saw an initial 16% decline from its 2011 high during the de-leveraging phase of the most recent risk asset sell-off.

The gold spot price saw a rapid rebound in H2 2008 once the worst of the de-leveraging phase was over. The gold price recouped its de-leveraging-driven losses in 2008 within 4 months; major equity benchmarks remained 20% below pre crisis levels 2 years later. After initial underperformance, gold outperformed major bond benchmarks 12 months after the credit crisis.

Recent gold price correction brings gold price back to its long term trend growth path. The gold spot price is now back close to its 200 day moving average following the recent price correction.  In July this year the gold price rose substantially above its short and medium term price trends as indicated by 50 day and 200 day price moving averages.

Futures investors were the main driver of the sell-off as ETP investors held positions. Gold Exchange Traded Product (ETP) investors largely held their positions through the price correction, as did physical investors, indicating short-term futures investors were the key driver of the gold price sell-off in September. Since the 89% rise in futures margins August-September, COMEX gold net "speculative" long positions have reversed from two year highs to over two year lows - knocking out the bulk of the 'speculative froth' in the gold futures market.

Gold price rise of past few years does not resemble that of previous asset price 'bubbles'. The gold price increase over the past few years has been far less pronounced and steadier than major financial "bubbles" of recent decades.

Commenting, Daniel Wills, Senior Analyst, said: "The recent gold price drop is consistent with its performance during previous risk asset corrections, with financial de-leveraging and a demand for immediate cash liquidity likely the main causes of the recent price correction. In the last major risk asset sell-off in 2H 2008, the gold price rebounded swiftly after the initial de-leveraging phase of the sell-off.

"The rise of the gold price in recent years does not resemble previous asset bubbles, with gains a fraction of those seen during the NASDAQ bubble in the 1990's and the gold bubble in early 1980's. The gold price rise of the past few years has been steadier and has not yet exhibited the exponential rise that has historically preceded a price crash."

Ends --

Commodities Now readers can view the report HERE