Is Gold a Safe Haven in Bad Times? 

I often get asked is what’s my thoughts about gold and whether gold is the asset to buy and hold onto in times of turmoil?

In fact, I think many of us have long believed that gold can act as an insurance policy against hyperinflation and a market in turmoil. I myself held this belief.

I didn’t think that gold was the key to wealth and I know that compared to stocks, gold could not measure up. Yet, I use to keep a small percentage of my portfolio in SPDR Gold Shares (NYSE: GLD). I thought that if everything around me fell to pieces, I would at least have an asset that was immune to bad times and one that would do well.

As it turns out, this belief was wrong.

Famed Jason Zweig of the The Wall Street Journal explained in his article “Gold: It’s Still a Pet Rock”, that gold isn’t a very good insurance policy after all.

Zweig pointed out that in September of 2011, when Standard & Poor downgraded the US Government’s credit rating, U.S. stocks fell 7%, yet gold dropped 11%. He also noted that in October of 2008, when the global financial crisis was in full swing, U.S. stocks lost 17%, while the gold price fell 19%. In fact, says Zweig, at the end of October of 2008, the price of gold was approximately 44% below where it is now and approximately 25% higher in September of 2011. This led Zweig to ask, “is today’s chaos that much worse than the financial crisis? Was the summer of 2011 so much darker than today?”

In just one article, Zweig completely reversed my belief that gold was the one asset that would protect me in times of market crisis. Shortly after reading his piece, I’m completely convinced that gold is not a safe haven in bad times. Here is why.

The case against gold

  1. It will not protect against inflation- The most common argument for owning gold is that unlike cash, which depreciates in value because of inflation, gold retains its purchasing power over time. This is accurate to a point, since if we look at large spans of time- over hundreds and thousands of years, it has held its value in relation to cost of living. However, from the standpoint of an investor like you or I, who is interested in the next 5 years or perhaps a few decades at most, this does not hold true. The market is just too unpredictable. If we adjust for inflation, gold is 44% below its peak in 1980.
  2. Buying gold is a speculation- When we buy gold, we do so because we hope that one day, someone else will buy it at a higher price than we did. Unfortunately, this is not a likely scenario. If we buy an ounce of gold today, no matter how long we hold on to it, it will always be an ounce. It is true that gold has industrial uses, but demand for this purpose is low. In the end, it is not the function of the gold that drives the price, it is the sentiment of investors. 
  1. Opportunity Cost- If you want to compound your money, it would be wise to consider other assets that have a better chance of success, rather than buying buy physical gold or a gold ETF. I think Warren Buffet explained it best when he said the following:

“I have no views as to where gold will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money … It’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”

So much for gold being the safe haven and storage of long term value when time get tough…

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