Is gold a risk asset or a safe haven? This question seems to be a favorite among those who like to debate the shiny metal’s value. The problem with the question is that it doesn’t offer the correct choice. Gold is neither a risk asset nor a safe haven. Gold is a store of value. It has been a store of value for all of recorded history, and if recent central bank purchases are any indication, it is still viewed that way today by many countries around the world.
One of the reasons the debate over whether gold is a risk asset or a safe haven seems to live on is the fact that one troy ounce of gold has a monetary value priced in fiat currency. This monetary value fluctuates up and down. As it does, people like to call gold a risk asset or a safe haven, based on how the fiat monetary value is performing relative to asset classes such as equities or fixed income. It seems like every time we see gold, in dollar terms, move in a direction opposite the S&P 500’s (SPY) daily movement, the debate heats up. Furthermore, people like to point out the bear market that dollar-priced gold suffered during the 1980s and 1990s as evidence that gold is neither an inflation hedge nor worth owning over long periods of time.
All of this misses the point about what gold as a store of value represents in a fiat currency world. When owning gold as a store of value in a world dominated by fiat currency, the only thing that should matter to the owner is the number of ounces owned. If gold is being owned to protect against the destruction of the current monetary system, then debating its daily moments when priced under the current monetary regime is pointless. All that matters is how many ounces an investor owns. These ounces, kept as a store of value, would then either be converted into whatever new currency regime comes about, if the current one fails, or continue to be held as a store of value in those instances in which the owner simply doesn’t trust the new currency structure.
Another fascinating thing about the debate over gold has to do with whether the dollar and gold need to be as negatively correlated as many assume they are in order for gold to go higher. If the world’s reserve currency, the U.S. dollar, is strengthening versus other fiat currencies, but gold, priced in dollar terms, continues to go higher, gold might be sending us a different message from what many typically think. In fact, since the spring of 2008, the dollar has strengthened considerably versus the euro (FXE) and the pound (FXB). Since the fall of 2007, the dollar has strengthened a decent amount against the Canadian dollar (FXC) as well. Finally, versus the Australian dollar (FXA), the dollar is down just a few percentage points since the spring of 2008. However, in that same time period, gold priced in dollar terms has soared.
Over the past three and a half years, those who focused on the performance of the dollar index or specific currency pairs to decide whether the current monetary regime was stable missed the true gauge of stability for fiat currencies: how many ounces of gold you can purchase with your fiat money.
In the end, the debate about whether gold is a risk asset or safe haven is a futile one for the investor purchasing the metal as a store of value. A more salient debate might be in what way the purchaser of a store of value should allocate his or her funds between gold and other stores of value, such as silver, platinum and perhaps even copper. Or perhaps the debate should focus on issues such as what an ounce of gold might convert to under a new currency regime, whether governments will act to confiscate gold in the event of a currency regime failure, or whether gold valued in fiat currency terms might be taxed to oblivion when investors attempt to convert it into a new currency (if that time ever comes).
One other aspect of the gold debate, often debated among those who buy gold or gold related financial products, is the method in which gold should be owned. For those investors who do not view gold in its historical context as a store of value, they might be interested in owning ETFs, such as the GLD or IAU. For silver and platinum, the ETF alternatives would be the SLV and PPLT, while copper’s exchange traded note alternative is the JJC. The reason I mention the exchange traded products as not being a store of value is that if a situation arises in which it would be necessary to put into practice gold’s (or any other metal’s) role as a store of value (new currency regime), by only owning shares of a fund that claims to own the metal, chances are pretty good you won’t be able to take advantage of gold’s role in the new currency structure. In other words, if you aren’t able to convert those shares of an exchange traded product into the physical product (most people won’t be able to), then how can you be sure the shares will transfer over appropriately to a new currency?
The same idea goes for gold, silver, platinum, and copper futures. The leveraged futures markets offer nothing more than promises to deliver something in the future. However, when the number of ounces of a metal promised to investors far exceeds the number of ounces available to be delivered, promises will be broken in the event of a run on the metal. Do futures traders really think a government’s taxing authority is going to give them a product that offers tax advantages (1256 contracts) and also provides the owner of the contract a guarantee to take delivery of a product that is taxed as a collectible for those who own the physical?
I don’t claim to know what the ultimate outcome will be for people who own metals as a store of value. I am neither a “gold bug” nor someone who dismisses the affinity shown toward the metal both throughout history as well as today. Nevertheless, gold is sending important messages about the current state of the financial world. Ignoring those messages might end up perilous to each individual’s financial future.
Disclosure: I am long gold, silver, and platinum.