Simply put, gold is far from a safe investment. The reason for this is that gold is traded with high levels of margin, sometimes as high as 50:1. Large institutional money that owns gold also tends to own other things such as stocks, and other commodities. When the stock market goes down, large institutional money such as hedge funds are forced to raise money quickly. In a rush to raise money, gold is often liquidated. As gold is sold to raise cash, it causes the price to go down which triggers margin calls in gold. The margin calls that are triggered force people to sell, driving the price lower and causing further margin calls. Another reason why gold does not do well in times of panic is because it is priced in US Dollars. When panic sets in, the dollar tends to rally sharply, this puts additional pressure on gold. The chart below shows how gold performed vs. the stock market during the 2008 crash.
Gold did not go down as much as the stock market, but gold did fall significantly. The big move in gold interestingly did not come until the crisis in 2008 had abated. The European crisis could play out in a similar way for gold. During the crisis, gold will go down, but once the crisis is solved with the inevitable printing of money gold should shine again.
The inverse performance seen in the chart above from late 2007 through early 2008 is not dissimilar to the performance of gold vs. the stock market in mid 2011. The chart below shows gold vs. S&P 500 over the last 6 months.
Notice how during the middle of the year, gold and stocks moved inversely. (Similar to what happened in late 2007- early 2008)
However, over the past month the correlation between gold and stocks has been very strongly positive. The chart below shows gold vs. the S&P 500 over the last month.
So if you are buying gold for protection from a crisis in Europe, you will most likely be disappointed in the short term. The best investment to bet on chaos in Europe is the VIX, or US Treasury market. However, if you are buying gold because you think the solution will ultimately be the printing of more money, then you will be happy with gold in the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.