Market Spotlight: Gold

Gold remains the world's supreme "safe haven" despite a pullback in the past few weeks, analysts say.

The precious metal has gained 9 percent so far this year but remains well off its all-time high of $1,038.60, reached on March 17. This decline has been modest against the backdrop of a seven-year bull market in which gold prices have nearly quadrupled _ in 2001 an ounce of gold was worth less than $260.

Then, the economy slipped into recession, and the Sept. 11 attacks happened; the dollar began to plunge, the U.S. invaded Afghanistan and Iraq, and inflation reappeared in the market's consciousness; the mortgage industry collapsed, oil breached $110 a barrel _ and now many believe the economy is once again receding.

"As the credit crisis really began to bite, we had a massive movement into gold by investors seeking safe haven," said James Steel, a gold analyst at HSBC.

With the Federal Reserve pumping liquidity into the financial system and orchestrating a bailout of Bear Stearns, gold then began to tumble. In its worst trading day in two years, gold plunged slipped about $66 to settle at $949.70 on March 19, then last week it dropped to under $900.

What happened? Markets calmed down a little, and the Fed showed it was willing to do whatever it took to rescue the financial system. Also, a lot of hedge funds and institutional investors that had placed bets on gold cashed in their bets.

George Milling-Stanley of the World Gold Council said any time prices vault as rapidly as gold prices did earlier this year, some of the players in the market are going to consider cashing out.

"That short-term spurt tends to attract the attention of those who were in there for short-term profits," he said. "There were speculative profits to be taken, and some of the speculators took their profits."

Milling-Stanley said a 14 percent decline is minor considering gold has jumped an average of $100 a year the last seven years. Plus, it is typical for bull markets to sustain occasional pullbacks, he said. In this case, gold "got ahead of itself."

Milling-Stanley said the long-term outlook for gold is stellar because the underpinnings of the bull market _ geopolitical instability, high energy prices, fear of inflation, weakness in the dollar _ remain in place.

But can a market prone to such pullbacks be considered a "safe haven"?

HSBC's Steel said many investors maintain a mistaken belief about what a safe haven is. Gold is one because in the long run it hedges against inflation and economic distress. It does not mean you can park your money in gold overnight and be promised a quick payoff if the newspapers carry a scary headline the next morning.

Carlos Sanchez, an analyst at CPM Group, said it would be prudent to put 3 percent to 5 percent of a portfolio in gold to diversify and protect against volatility.