Gold is often seen as a safe haven during tough times.
But what does that mean, and is it really true?
In this blog post, we’ll take a closer look at gold as a safe haven and see if it really is the reliable investment people think it is.
Why And When Is Gold Seen As A Safe Haven?
Gold is seen as a safe haven because it has been used as a reliable store of value for centuries. Over time, its value has held up against currency devaluation and other economic issues, making it an attractive asset to hold on to in times of turmoil.
Furthermore, gold does not rely on the performance of any company or country – it’s a physical asset that will always have some sort of value, especially as there are many uses for it, such as in jewelry and electronics.
It’s also seen as a hedge against inflation, meaning it often goes up in value when other assets decrease in value.
All of these reasons make it an appealing option for people worried about the performance of stocks or bonds in times of economic uncertainty.
My Experiences And How I Invest In Gold
Like most other people, I also saw gold as a bit of an insurance policy against potential losses in the stock market.
I didn’t think that gold was the key to wealth and I knew that compared to stocks, gold could not measure up. Yet, I used 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.
The Case Against Gold
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%.
- 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:
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.
3. 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…
The Bottom Line
Gold may have its place in a portfolio, but it is not the insurance policy I thought it to be.
In reality, gold is just like any other investment – you should invest only what you can afford to lose and never forget that past performance is no guarantee of future returns.
Do your own research before making an investment and always keep your goals in mind. If gold fits into your portfolio, then go for it – otherwise, diversify and invest in a variety of assets with potentially higher returns.
Good luck!
Terry
