IS GOLD REALLY A SAFEHAVEN ASSET?
Is gold really everything it’s cracked up to be? Is it actually a safe-haven against recession & depression? These statistics from Elliot Wave might surprise you:
By Nico Isaac at EWI
As I sat down to watch the Oscar pre-show on Sunday night, March 7, one word was repeatedly used to describe the celebrity starlets and their designer duds: GOLD. Gold bustiers and gold lame skirts, shiny gun-metal dresses and glittery sequined gowns all basking in the golden shadow of the final golden statue.
Everywhere you look, from the Red Carpet to Wall Street, gold is definitely in “fashion.” As for why, one word comes to mind: safe-haven. See, according to the mainstream financial experts, the more unstable the global economy, the greater the appeal for the precious metal.
And, with a staggering 17% unemployment rate in the United States, alongside slumping real estate sales, Eurozone weakness, the Greece debt debacle, and so on — the only thing going up is gold’s supposed disaster premium. Here, take these recent news items for example:
- “Bullion Sales Hit Record In Stampede To Safety.” (Financial Times)
- “Gold Ticks Higher On Safe Haven Buying. The risk trade is resuming.” (AP)
- “Gold Rose to 6 ½ Week Highs as the metal benefits from fears over financial instability in general. The market is looking for some security with gold.” (Reuters)
- “Gold Rush: This is a new round of safe haven buying.” (Bloomberg)
There’s just one problem: The correlation between a falling economy AND rising gold prices is based solely on hype, NOT history.
Case in point: In the March 2008 Elliott Wave Theorist (republished in his 40-page Gold and Silver eBook), Elliott Wave International President Bob Prechter presents an indisputable case AGAINST the safe-haven status of gold.
The first piece of evidence: The following table showing gold’s performance during the 11 officially recognized recessions beginning in 1945.
Prechter also plotted the Dow Jones Industrial Average into the same period and made this startling discovery: The average total return for the Dow during recessions since 1945 is 6.89%. Taking into account modern transaction costs, the Dow actually beats gold with a 6.87% return.
The most powerful myth-debunking punch of all, though, came via the second chart of gold’s performance — this time during periods of financial growth.
In Prechter’s own words:
“All huge gains in gold have come while the economy was expanding… The idea that gold reliably rises during recessions and depressions is wrong. In fact, like most such passionately accepted lore, it’s backwards.”
Source: EWI
The point of gold is not that it is a hedge against a recession. It is a hedge against inflation.
Your data seems to support this hypothesis.
In the 1970s, gold produced a positive return. Inflation was high.
From 2001 to 2008 the return was also positive. This was also a period of high inflation. Although the CPI did not show high inflation, during this period houses, food and commodities all increased in price.
Is gold really the best alternative though? That is my question. Is it really the best hedge against paper money? As I’ve previously discussed, gold has no link to the dollar in a non-convertible floating exchange system. NONE. So it is not an alternative to the dollar. We will never revert back to the gold standard so the whole “gold as currency” argument is bunk. Myth.
The price of oil and most other commodities increased in 2001-2008 due to real demand. Not inflation. Yes, there was more paper in the syetem, but not to the extent that it was causing high inflation. In fact, inflation has been and remains very benign.
So it gets to the heart of the debate. Are you buying gold because you (incorrectly in my opinion) believe it is a viable dollar alternative? Or are you buying it because the supply/demand mechanics appear favorable?
That is the important notion here. Gold has no purpose in this world as an inflation hedge because it has no link to fiat money in a non-convertible exchange rate system. With no real inflation currently you have to ask yourself if the supply demand mechanics appear favorable and that’s it.
Just my opinion.
I agree with aptcapital. Gold’s movement is always a currency issue, not a general ‘safe haven’ issue. Gold has historically acted as a currency alternative, but like any asset class, has been subject to cycles (70′s rise, 80/90′s fall, 2000-present rise).
TPC, I don’t understand how you believe there was no inflation since 2000. Oil skyrocketed from 2000-2008 along with food and other commodity prices. This was a result of ever increasing liquidity hence inflation. In the mean time, the dollar has been in continuous decline. It was not as much due to demand. If you measure many commodity prices/oil in gold (which by the way, prechter himself calls “real money”), they were almost flat from 2000. This shows their price rise has more to do with the eroding value of fiat currency, more than actual demand.
I will never use prechter as a guide on gold. He has got it wrong right from the very beginning of the bull market in 2000, when he said that gold had peaked at $300 and was on its way down to $200. Ever since, he has maintained a bearish view while gold continues to rise and the dollar falls.
KBob, you are correct about Elliott Wave and their calls on Gold (and Silver)—-it seems whatever they say the market does the opposite, and that is consistent across virtually all markets. I honestly believe that if you trade the other side of their recommendations, you could make some serious coin—-perhaps that is exactly what their buddies at Goldman Sachs do.
You could throw darts at a YES/NO board and do better with Gold than Prechter and Elliott Wave. This company has destroyed the finances of more traders than any other company in history as far as I can tell, yet, people still give them ink to print their horrible advice.
so when in history did the world’s reserve currency have unsustainable debt laid out like a road map?
and their only manufacturing sector left of any importance (housing) lay in shambles for decades?
near and middle range deflation a good time to buy more gold.
money printing parties always produce inflation at a point.
any way how else are they going to get home prices up to what their mortgage is?
i’m a big history buff, but things do change…..and this time is different.
this is not the dotcom bubble.
his analysis by EWI is not very useful or persuasive. During five of the eleven recessions the price of gold was fixed. The grandaddy of them all, when the price of gold did rise significantly, is not included. Anyway, the notion that gold is a “recession hedge” is a straw man. Gold is a hedge against monetary instability.
2008, when gold fell from above $1000 to below $700 during the crash, is a good example of this. It would be foolish, in my opinion, to assume it will not happen again when the next massive bout of de-leveraging occurs and those who are over-leveraged have to sell whatever they have, that anyone will buy, to cover their losses. While true that gold didn’t fall as much as the stock market during that same time period, it did drop more than 1/3 of its price (in dollars, anyway).
Many of you seem to miss the whole point of gold’s utility. But if you tried to buy actual gold or silver during the 2008 fall from 1000 to 700 you would have paid much more than the official “spot price”. Gold’s value here is two fold to me: Diasaster insurance, and i don’t mean EOTWAWKI protection but similar to the Depression, and simple supply and demand. Also when you don’t get any return on your money at a “bank” then what opportunity ccost does gold have? Unlike the market where 40-50% drops every few years seem to be the new norm. But, hey keep hatin because it has helpme make money ever since 2000!
No worries, EWI is ALWAYS WRONG, so all of you Gold Bulls take heart. Prechter has been making predictions for many years through his investment newsletter, Elliott Wave Financial Forecast. Newsletter tracker Mark Hulbert has been documenting Prechter’s investment trading predictions and picks since 1985 so he now has a nearly 25 year long track record which can tell us whether you should trade on his predictions or not.
Here’s how Prechter’s trading advice has done from 1/1/85 through 5/31/09 versus the broad U.S. stock market average (Wilshire 5000 index) according to Hulbert’s analysis:
Annualized Return:
Wilshire 5000 Index + 9.7 percent
Prechter’s Trading Advice -15.4 percent
Total Return:
Wilshire 5000 Index + 857.1 percent
Prechter’s Trading Advice – 98.3 percent
The underperformance of Prechter’s newsletter is nothing short of astonishing and stunning! On an annualized basis, Prechter has underperformed the broad U.S. stock market Wilshire 5000 index by a whopping 25 percent per year! Here’s what Hulbert’s analysis shows would have happened to $100,000 invested according to Prechter’s investing trading advice versus the Wilshire 5000 U.S. stock market index:
$100,000 Invested (1/1/85-5/31/09):
Wilshire 5000 Index $957,100
Prechter’s Trading Advice $1,700
So Gold Bulls, take heart, Elliott Wave is almost always wrong. In fact, my studies on them indicate to me that it is almost impossible to be so consistently wrong about the markets, so one has to wonder if they aren’t paid by the the banking oligarch to herd the cattle to slaughter—-never know. One thing is for sure, however, and that is the performance numbers don’t lie.
And for those of you that will say, but prechter got it right on the 2008 downturn, save it, he had been predicting that downturn since 1987—-even a stopped clock is right once or twice a day!