Gold Undeperforms Despite Weak Dollar

A theoretical $1,000 investment in commodities would have yielded better returns had the money been stashed in copper, wheat, gasoline, soybeans or crude oil from January 1, according to Thomson Financial data. Asian and European stocks and mid-cap U.S. equities all would have outdone gold.

Analysts point to several reasons for gold's underpeformance. Large speculators have had to unwind positions in the gold market to fund holdings elsewhere, as credit markets tighten up, they say. Gold also faces competition from investors' easier access to the commodities markets in general.

Mike Zarembski, a senior futures analyst with optionsXpress Inc., attributes the metal's lackluster showing in part to the developing liquidity crunch among large speculative players in the commodities markets.

As troubles have unfolded in the subprime lending market -- where defaults on loans made to people with spotty credit have climbed -- overall credit conditions have tightened. When big speculators need to unwind holdings to curb losses, they'll turn to the most liquid positions in which they can convert assets to cash very quickly, Zarembski said.

Gold is one of the most liquid commodities, next to oil.

Also, the gold market last week saw a outflux of long positions, or bets on rising prices, according to the latest report by the Commodity Futures Trading Commission, which tracks speculative holdings in the commodities market. Those bets decreased by 40.5 percent in the week ended July 31.

But George Milling-Stanley, spokesman for the World Gold Council, suggests that such a sell-off rather supports the idea of gold as a safe-haven asset. He points to the drop in gold prices after the stock market's Black Monday in 1987 -- which sent the Dow Jones industrials down a then-unheard-of 508 points -- or during the stock market's sharp drop in February this year.

"When equity markets turn south, some people have sold gold in order to meet margin calls on equities in which margins have soured," he said. In that way, "you could say (gold is) fulfilling one of its functions as a safe haven."

Gold should have found more solid support this year from trends in the currency and energy markets, analysts say. A weak dollar and high oil prices can signal inflation and underpin gold as a result, as some investors use the metal as a safe-haven asset when inflation fears run high. All year, the Federal Reserve has maintained that its primary concern for the economy is inflation, and the central bank reiterated that position at its regularly scheduled meeting on Tuesday.

Meanwhile, oil may be capturing more of the dollars that in the past would have gone to gold, analysts say. For retail investors, getting exposure to gold and other commodities "has historically meant something relatively esoteric and expensive, like opening a futures account or buying gold coins," said David Burkart, senior portfolio manager with Barclays Global Investors, which offers a range of ETFs.

But with the growth in exchange-traded funds, which can track the price of a given commodity or basket of commodities, investors have easier access to the commodities markets than they once did.

Gold, which peaked last year above $725 an ounce, hasn't cracked the $700 mark yet in 2007. But Milling-Stanley notes the $100 climb to $725 last year took just 18 trading days and resulted in a sharp correction downward.

"It has taken a while to recover from that knock," he said, but "we've gradually crawled back up."

Gold for December delivery fell $1 to close at $682.30 an ounce Tuesday on the New York Mercantile Exchange.