We often hear that gold is a “safe haven” investment in times of crisis, and yet in the recent crisis in Japan the price of gold dropped sharply, along with every other type of investment and most of the world’s currencies aside from the Yen and the US dollar. So is gold really a safe haven?
The answer is that it depends what you mean. In the short term when a crisis occurs investors of every stripe become risk-averse to every investment, including gold. When investors sell investments what they get in return is currency, mostly US dollars. Investments decline, currencies strengthen and the US dollar strengthens the most. In this most recent crisis in Japan there is a complicating factor in that Japan is selling US dollars to buy Yen to pay for reconstruction, so the Yen is even stronger than the US dollar. But the universal tendency in the immediate aftermath of crisis is to dump anything that entails risk, and that includes gold and its derivatives like ETF’s, gold mining stocks and the currencies of resource based economies like the Canadian dollar.
Then, as the crisis subsides and recovery begins, investors return to the investment markets, for two reasons: the investments they dumped a few days earlier now look like bargains, and there are real opportunities that come from the industries that will benefit from the reconstruction after the crisis. Gold once again gets caught up in this return to risk-tolerance and rises accordingly, often to levels higher than it was before the temporary sell-off triggered by the crisis.
So short-term it is not correct to say that gold is a safe haven investment. It is, in fact, subject to the same fluctuations as any other risk-based investment. But the volatility of the gold price during times of crisis creates interesting investment opportunities for those not faint of heart!
But longer term a different set of factors comes into play. Over the long term gold acts as a counterpoint to currency inflation, in particular to inflation in US dollars. As currencies in general, and the US dollar in particular, erode in value due to inflation, gold tends to rise in value, producing a “constant dollar” price that is pretty much consistent. In this respect gold is a good “buy and hold” safe haven against currency inflation.
In addition, gold in physical form like bars and coins, is portable and universally accepted. In many places in the world where the local currency is extremely unstable, physical gold is prized as a form of portable wealth, and a safe haven against crisis in the local currency, government or economy. People fleeing a troubled country can count on gold to get them started in a new homeland. The local currency of their old country might well be worthless.
