Gold Prices Falling Amid Global Financial Crisis

Contrary to conventional wisdom, gold is plunging despite the global financial turbulence.

Gold for December delivery fell 20.50 U.S. dollars or 2.9 percent to close at 714.70 dollars an ounce on the New York Mercantile Exchange Thursday. It sank to 695.20 dollars at one point, the first time since September last year.

Often seen as an investment safe haven, the price of gold usually rises when the global economy is in trouble.

Right after Bear Stearns went bust in March, the price of gold surpassed 1,000 dollars an ounce and went past 900 dollars when Lehman Brothers went under last month.

With the worst economic crisis since the Great Depression of the 1930s looming, however, things are going against conventional wisdom.

Natalie Dempster, an analyst at the World Gold Council, told MarketWatch that the failure of gold to rise this time seems to reflect the combination of the surging dollar, deleveraging of commodity positions, sales to meet margin calls, and the unwinding of the long gold and short dollar trade.

Amid the intensifying global credit crunch, investors are pulling their money out of risky assets, helping the dollar surge against major currencies, including the euro. This has depressed dollar-denominated gold prices.

Another contributing factor is the selling spree of gold futures to meet margin calls.

Sagging demand for jewelry stemming from the economic downturn is also fueling gold’s fall. According to the London-based market research company Gold Fields Mineral Services Ltd., jewelry accounts for 60 percent of the world’s gold consumption.

spear@donga.com