Gold Crashes by 5% But Posts Strong Annual Gain in Sterling

By: Mark_OByrne

Gold fell sharply yesterday and gave up some of its recent gains. Gold for February delivery dropped $42.20 to end at $776.80 an ounce or 5.4% on the New York Mercantile Exchange. The sell off begin in Asia on sharply lower oil prices and continuing dollar strength but continued as European and US stock markets again fell sharply.

US markets fell sharply with the ‘news’ that the US economy has been in recession since last December (we have said as much for many months). The Dow Jones was down 7.7% and markets in Asia also came under pressure with the Nikkei falling by 6.35%. However, markets in Europe are proving more resilient this morning and have mounted something of a rally this morning after the sharp falls yesterday (FTSE -5.2%).

While gold fell sharply yesterday in dollars, it is important to remember that most currencies fell against the dollar again yesterday and thus gold has again acted as a safe haven in the domestic currencies of investors internationally.

The London AM fix yesterday was $795.50 (USD), £529.77 (GBP) and €629.40 (EUR) and today it was $772.50, £521.33 (GBP) and €610.33 (EUR) (see http://www.lbma.org.uk/?area=stats&page=gold/2008dailygold ). Thus gold fell by a modest 1.6% in British pound terms and by 3.1% in euro terms yesterday. Gold has been correlated with stock market movements in the very short term in recent months and when stock markets have fallen gold has also fallen but nearly always by far less in percentage terms. In the days following the many sharp sell offs in stock markets, gold has recovered and bounced more sharply than stock markets.

Gold in pounds sterling

This has led to a sharp outperformance of gold vis-à-vis every stock market in the word (see Chart and Performance table).

On January 2nd 2008, gold’s London AM Fix was at £424.81 and €573.34. Today’s fix was £521.33 (GBP) and €610.33 (EUR). Thus gold is up by 22.7% in pound terms and 6.45% in euro terms. Conversely, the FTSE is down by 35% since January 2nd.

Considering that gold had already outperformed all other asset classes in the last 7 years (a roughly 20% return per annum), this is quite an achievement. Especially given the extraordinary and unprecedented financial and economic times that have confronted us in 2008.

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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