Gold loses luster as Europe woes boost dollar appeal

As Europe’s debt crisis deepens, low-yielding U.S. government debt and the much maligned dollar are suddenly glowing more brightly than gold.

After surging to a record high above $1,900 an ounce this month, gold has shed about 8 percent over the past two weeks, with about a quarter of that decline coming on Monday.

Instead, investors snapped up long-dated Treasuries, and poured into the dollar even though the Federal Reserve has all put promised to keep short-term interest rates near zero until at least mid-2013.

“It’s a very unsettled world out there,” said Wan-Chong Kung, senior portfolio manager at Nuveen Asset Management in Minneapolis, an affiliate of Nuveen Investments, which oversees $210 billion in assets. “There are precious few true safe havens in the minds of investors.”

Over the last few months, gold had been viewed as one of the most solid of safe havens, particularly at a time when developed countries saddled with slow growth and high debt have been trying to inject life into their economies and export sectors with weaker currencies.

For some, worries that massive monetary and fiscal stimulus would eventually stoke inflation also pushed gold higher.

But fear that a Greek default would push other indebted euro zonecountries further into distress and spark losses across the European banking system has investors falling back on the depth and safety of the dollar.

“People are moving straight to cash instead of looking at alternative safe assets like gold,” said David Meger, metals trading director at Chicago’s Vision Financial Markets.

Money managers summed up their own cautious views.

“I’ve pulled in my horns a bit, staying fairly close to neutral,” said Gregory Whiteley, who manages a government bond portfolio for Los Angeles-based DoubleLine Capital, with $16 billion in assets. “The thing in the back of my mind is this situation in Europe.”

Dan Fuss, vice chairman of Loomis Sayles, which oversees over $160 billion in assets, told Reuters the firm began increasing its U.S. dollar-asset exposure during the summer as unease about Europe and the U.S. economy started to grow.

Loomis’ dollar exposure has climbed from 60 percent to 70 percent while non-dollar exposure dropped from 40 percent to 30 percent, Fuss said.

“We increased our exposure in U.S. dollar-assets also because the world got a little bit scarier,” he said. “These are short-term tactical moves. That said, the U.S. is still far and away the best credit in the world.”

John Taylor, chief executive officer of the $8 billion currency hedge fund FX Concepts, said on Monday he was still long U.S. dollars. Taylor, who predicted late last year that the United States could enter another recession in 2011, also said he continues to be bearish on U.S. stocks.

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