Review & Outlook

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In Uncertain Times Gold is Not a Safe Haven

5 June, 2012 by Ben O'Brien in Commentary

With gold down substantially from its high in 2011 and continuing to decline even in a time of extreme economic uncertainty that drove the yield on 10 year Treasuries to record lows, MarketWatch’s Jack Hough argues that the metal is not a reliable safe haven:

After sliding 6% in May, the price of gold jumped 3.7% on Friday. Skeptics say it is a temporary rise in a longer downturn. Fans of the metal say it is the start of another glorious run. Picking a side is pointless. Gold defies efforts to calculate its worth—or even to describe how it behaves as an investment. That means there isn’t a clear reason to invest in it. …  Gold is prone to long booms and busts. Before its latest dip, it multiplied five times in value over a decade, mocking stocks and other investments. Before that, it lost money for 20 years. Some investors look to gold as a safe haven. It is one—but only when it wants to be. Just over two years ago, when investors learned that Greece’s deficits were much larger than officials there had reported, the metal followed U.S. Treasurys higher while Greek government bonds crashed. Yet last month, with Greece’s fiscal crisis intensifying, Greek government bonds again tumbled while U.S. Treasurys rose, but this time investors dumped gold.

Stocks and bonds, unlike gold, have cash flows. They produce earnings and dividends or coupon payments that can be valued. They have underlying businesses with management and products and services that can be studied. The price of Gold, while it has made an impressive run over the last ten years, is driven by unpredictable speculation. As Hough points out, gold’s apparent negative correlation with stocks can break down just when you need it most as it has in 2012. Click here to read the rest of the article.