Gold And The 'Safe Haven' Myth

Includes: GLD
by: Skyler Greene

Gold bugs often claim that gold is a "safe haven" asset. A quick fact check proves otherwise.

According to Investopedia, the definition of a safe haven is:

An investment that is expected to retain its value or even increase its value in times of market turbulence. Safe havens are sought after by investors to limit their exposure to losses in the event of market downturns. However, what are considered safe havens alter over time as market conditions change, and what appears to be a safe investment in one down market could be a disastrous investment in another down market. Fortuitously timed buy and sell decisions can make an investment appear to be a safe haven when it may not actually be one.

For an asset to be a "safe haven," then, it must retain value. A glance at the chart of the SPDR Gold Trust (NYSEARCA:GLD) shows that anyone who bought gold last summer assuming it would "retain its value" was sorely mistaken.

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A look at a longer-term, inflation-adjusted chart shows that while gold has certainly provided phenomenal returns over the past decade, it hasn't exactly been a long-term "safe haven."

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As I've discussed before, gold has no real "intrinsic" value other than that which we assign to it. (What Happens to Gold's Intrinsic Value Post-Apocalypse?) Bonds have an "intrinsic value" of sorts -- they promise a certain amount of yield over a certain period of time. Companies, too, have an intrinsic value: they have assets and earnings power. But gold is simply something pretty, with limited industrial uses.

As such, gold is a fear asset. People flee to gold when they think other assets will do badly. From 1980-1999, the overall US stock market did great, and Treasuries yielded between 5-10%. There was no reason for people to put their money in gold, a non-yielding asset. Hence gold prices fell.

Today, on the other hand, fear levels are through the roof due to the Euro crisis and the sluggish recovery in the U.S. Treasury yields are pathetic, and few investors are confident in the state of the market. From Barrons:

Investor fear about U.S. stock market correction has gotten quite high relative to the fear about stocks on many other major country exchanges. High put skew, which is what now defines the Standard & Poor's 500 Index, demonstrates that investors are buying puts to prepare for a stock market decline. Analysis of one-month skew of the world's major indexes show fear of a correction in the U.S. is also very high on the Nasdaq-100 and Russell 2000 Index of small-capitalization stocks.

Investing in gold is mainly a fear play. I believe the price of gold will continue to rally as the situation in Europe unfolds, but I strongly disagree with the "buy gold and hold forever" strategy. Once the current bull market reaches its peak, a crash will inevitably follow, just like it did 30 years ago.

History shows that gold is NOT a safe haven asset. Gold is a fear asset.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long SLV.