Alessio Rastani: Is gold a safe investment in a financial crisis?

G

glam

Member
Whenever the markets go into some kind of turmoil, I always start to hear the same old nonsense over and over again. One piece of misinformation after another.

One particular favourite of mine is an "old wives tale" about gold.

Gold is seen by many investors as a safe haven, and perhaps for good reason.

It is arguably a safe hedge against a devaluing currency like the US Dollar. Further printing by the central banks will no doubt put further downward pressure on the currency and conversely boost gold.

Many investors also see gold as a protection against the threat of hyperinflation in an apocalyptic future.

All of the above are good reasons for holding gold as an investment.

However, most people don't seem to understand what is meant by the "safe haven" status of gold.
The Flight To Safety

Last September the world seemed to be on the brink of a global recession and the markets were in deep turmoil.

The question on everyone's lips is that what is "safe" to invest in and answer to that provided by many financial blogs, social media sites as well as "experts" was gold.

In actual fact the "gold bubble" which started in 2009 fizzled out about the same time when the economy faced another challenge. In September 2011 gold dropped from its highs at $1900 an ounce to just below $1600 and is currently still valued at that same level.

The 2008 recession saw gold losing 25% of its value when it dropped from $1000 to $750.

So what's going on? Why is gold dropping when it "should" be rising given the economic uncertainties?

The truth is that in a financial crisis, when investors are getting jittery about the markets, all asset classes get sold including gold (and silver).

This is known as the flight to safety.

When hedge funds are taking off risk (i.e. moving money away from stocks) they move it into safety.

Again, most people are under the impression that "safety" in this context means gold and silver.

No.

The flight to safety means a flight to liquid safety.
Liquid Safety

Liquidity means how easily and quickly an asset can be sold without incurring losses and affecting the price of the underlying asset.

Hedge funds seek liquidity and precious metals like gold and silver are not liquid.

Gold and silver are liquid for us, the retail investors. We could move money into and out of gold without much difficulty.

However, for a billion dollar hedge fund gold and silver are not liquid. A billion dollar hedge fund cannot just move money in and out of metals without incurring losses.

So in times of economic uncertainty or a financial crisis, hedge funds will seek safe liquidity and by that we mean US Treasury bonds and the US Dollar.

The US Bonds are still the world's most liquid safe havens.

Most people find it confusing that the US Dollar is referred to as "safe" in this context. Surely the dollar is a devaluing currency and on its way down?

Yes, again it is true that the dollar is devalued by inflation and printing. However, in times of economic uncertainty such as we have witnessed in Europe recently, investors will ditch the Euro and move their money into the US dollar.

Both currencies stink of course, but it just so happens that the dollar has a less pungent smell!

Investors also will also seek the relative safety of the US bonds to escape the crisis in the eurozone.

In summary, it is important to appreciate the context in which gold (and silver) are seen as "safe". We have seen that in recessionary periods gold prices have dropped a sign also that perhaps gold is being sold to raise cash.

A lot of myths and false assumptions are held about gold and markets in general.

Understanding the markets can help investors make better decisions instead of relying on a false "common sense".
Click to expand...

http://www.londonlovesbusiness.com/...investment-in-a-financial-crisis/3131.article
 
All depends what kind of safety you are after... are you after "I don't want to loose any currency safety"? The Gold it is not and cash it is. Are you are after "I don't want to loose it all safety", then Gold it is and cash it is not.
 
I think he explains the answer quite nicely to a question I have, during another 2008 like event, will gold go up or down? Will the flight to safety be to gold or US$?
 
a stackers strategy is different to the hedge funds. If an event like that happens hedge funds willl sell and price will drop but stackers who are in it for long term know that the gold value has not diminished its number value has. It is true that it would be nice to get out of an asset quickly when it starts to drop and get back in as soon as it starts going. All we need to know is to keep some spare cash if it does to buy more when it drops because whatever crash happens there are 2 possibilities the confidence returns and so does the price of gold and other assets or it gets destroyed and people realise that fiat is worthless and get into something tangible
 
I've always stacked gold, and though I may have lost a bit here and there through spot crashes or cash flow needs, I've done a helluva lot better than channeling my assets into real estate or banking.

I lost around $30k in the 2008 UK property crash, and I'm very dubious about property investment again.

There's been a lot of talk around of late around gold or silver being a disappointment in terms of generating income. I think that honestly, if your stacking in order to make $'s - your a bloody fool.

I stack to keep my hard earned $'s out of the bank, and losing value every year in the form of inflation.
 
Is gold a safe haven in a financial crisis? Probably no.

But what about a currency crisis? And that is what we will be dealing with the next time things go south.
 
RhythmDoctor said:
I stack to keep my hard earned $'s out of the bank, and losing value every year in the form of inflation.
Click to expand...
please that to hard for me just much easier to stick money in bank and then when i retire wonder why i cant buy that loaf of bread for same price as i did many years ago

u strange cookie and PARANOID to

do you have qualification in finance??? see my bank manager has qualifications and he says property is best investment he also says blue chips can only go up... he must be right cause he has a job as a bank manager

:rolleyes:
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Gold does crash along with other assets, but such short-term liquidation shouldn't define gold, which eventually does manifest its 'safe haven'-ness, as we saw happen after its 2008 drop.
 
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