IS GOLD A SAFE HARBOUR?
People still believe it and that’s the myth of Gold being a safe harbour in times of prices. If you actually research it, you can read it over and over in all financial magazines and online in blog posts. You have people telling you to buy Gold when the stock market is crashing because Gold would go up and so on and so on…
But if you really research it
...and that’s really easy to do because you only have to go somewhere and get the Gold price. You actually have to have a look at crashes that we had and then you experience exactly the same thing that I experienced: That Gold is a safe haven in times of crisis in an absolute myth!
What we can see here is a chart of the Gold price since January 2000. We had the .com crash, where the prices in the new economy went down and all the IT companies that were earning a lot of cash, came down dramatically. During that time, gold price goes down, then it goes kind of slightly up, then goes slightly down, a little bit back up and eventually if you would have the exact look at the day, I think the Gold price was actually 1$ higher at the end of the crash than at the beginning of the crash. If that myth would be true, you would expect a crash because the stock market at the same time crashed 50%. If the stock market would be correlated to the Gold, Gold would have gone up 50% in the other direction to the stock market.
There is also September 11th. That’s the day when it actually goes down. It went up in the aftermath of 911, but on 911 Gold dropped exactly as the stock market and everything else.
Now let’s go back to the next crisis: Financial Crisis 2008/2009. If you put in here the times of the beginning of the crisis and the end of the crisis, you would see the Gold price is pretty much exactly at the same point. The initial reaction is going down, then we are going up, coming down again and then we dropped down and going up again, dropped down further and up again…. So if you really thought that Gold would have been the safe haven here, than you were pretty much most of the time below the price and just a few times above the price. The likelihood that you would have lost money during that time if you would have went into Gold to sit out the Financial Crisis, that could have been very costly.
Downgrade of Greece
Later on, we had the Downgrade of Greece, so we are now in the European Financial Crisis. The story behind the Gold going up is basically that investors go from risk, which is supposed to be in stocks, shift to something “safe”. They are intended to go to Gold. If that would be true, that means the money that goes out of the stock market, that’s why the stock market is supposed to fall, it would go to Gold and this is why Gold would go up. Here we have the Downgrade of Greece on the 16th of October where the rating agencies said that we think that the burden of Greece is not bearable anymore. And therefore markets in Europe went down and of course it’s like every time that something like that happens: “Hey buy Gold”.
And as you can see, the first reaction of Gold was to go down. It kind of spiked up and it came down again. So you would expect stocks and bonds to be more secure now because Greece got finally rescued in the end. So now all the money that went into Gold should now go back into stocks. So people are selling on the Gold side and therefore the price should go down. However in reality the price went up. After Greece got rescued the price of Gold went up which doesn’t make any sense. Obviously the story is completely fraud.
In the middle of 2011
Gold spiked a lot. I don’t know if anyone remembers a huge crisis in the midst of 2011. But there wasn’t pretty much anything. Obviously Gold is a commodity that has a supply and demand side that doesn’t necessarily have anything to do with risk.
We can see here in these examples that if we think about these crisis that we had here, there is barely a difference in prices. In many cases you could lose a lot of money by simply following that advise. It’s an absolute myth!
Recently it became more prominent again with the stock market going down and you can read all the headlines now again of “Buy Gold!” again. If we have a look at S&P500 (500 biggest stocks in the US), you can see from the 21th of February we started to go down. So we went down until beginning of March, then up and then we dropped again. And from the mid of March we started to go up again. Remember that pattern! Because If you have a look at Gold price now, you can see something very similar! At the end of February we go down, then we come up again and drop again at the end of March. And when the stock market goes up, the Gold price goes up again. So actually that looks very correlated to me.
So you could use 25% in the Gold price during such a crisis. For me it is important to tell people about it because that myth is around for so long. People believe it because you hear it over and over again. I keep telling my students the same thing for years. If you think about risk management, we want to be safe. But we cannot be safe by switching from stocks into gold. So obviously that doesn't work. So a part of my risk management is to tell people that what many people think or belief that works, actually doesn’t. It’s very easy to demyth because you just have to look at reality! Don’t trust everything you read in whatever financial magazines. You can always listen but make sure to do your own research!
In the case of Gold it’s simply a myth!
You can watch a detailed video about it here: