LONDON () -- While a lot of commentators like to describe gold as a "safe haven" that investors run to in times of trouble, this has not really rung true so far in the present period of market upset.
Part of the reason is that contrarily, gold is actually seen as a risky asset by some - those who find the market for the yellow metal hard to read and in times of confusion are likely to withdraw to their own safe haven, which is cash.
Another contributing factor is that when investors are seeing upheaval across their portfolios - mostly resulting in losses - then a profitable position in gold is fair game to be liquidated in a bid to grab any return available before it ebbs away.
Yet another group of investors will be standing ready to plough big money into equities in anticipation of a rebound from the past few weeks' stinging losses, and will thus have liquidated their gold positions in preparation.
So who is buying gold right now? It must be a different breed of investor, one whose confidence in the stability of the financial system itself is lacking. Someone of the belief that present market conditions are much more than a mere blip - or to use the pleasing euphemism of the moment, a "correction"- but the beginning of a steep spiral downward for the U.S. economy.
But as ever when considering the gold market, the key factor is the state of the dollar. The ongoing period of market volatility has yet to manifest itself significantly in the parity of the dollar against other currencies, despite the fact that the trouble all started with fears over the U.S. economy, specifically the knock-on effects of the sub-prime mortgage crisis.
One reason that the dollar has stayed relatively strong even as the outlook for the U.S. economy has been looking wobbly is that in market shake-outs like the current one, the dollar is, to some, a safe place to be.
Another is that outside of the sub-prime issue, U.S. economic indicators don't look as worrying as they did earlier in the year. Although that could change, right now the signs will have motivated a contingent of investors to position themselves for a recovery in the U.S. markets if and when sub-prime worries recede, which is positive for the dollar in the short term.
Additionally, the major threat that towards the dollar that has reared its head within the present period of turmoil - the Chinese "nuclear option" of dollar destabilisation in the event of a trade war between the U.S. and China - has been talked down by China while the U.S. on its part has sensibly refrained from further provocation.
While the last has not been heard of this issue, in fact quite the opposite - a point I will expand upon in a future article - the conciliatory attitude adopted by both powers has provided temporary support to the dollar.
Nevertheless, if the fall out from the subprime crisis worsens, the market fails to pull out of the current spell of volatility and the whole mess feeds through to the wider economy, then we may yet see investors using gold as a place to park their funds apart from cash.
But the effect of a weakening U.S. economy on the dollar will be the main transmission mechanism for any effect the tumult will have on gold, not more direct safe haven buying.
