Gold: Some safe haven

Gold is frequently cited in the media as a safe haven asset that offers stability in a diversified portfolio and an anchor in uncertain times. The reality, however, frequently falls short of the billing.

By the end of 2012, after a dozen consecutive years of price gains by gold, many analysts were rewriting the record books and predicting stratospheric gains for the precious metal on expectations of perceived “safe haven” flows.

But that all changed in recent weeks when, in a two-day period, gold suffered its biggest correction since 1983, dropping 13% to around $1330 an ounce. Even seasoned traders expressed surprise at how fast it unravelled.

Three headlines covering a little over a six-month period tell the story:

  • “Safe haven gold is tipped to run up to $3000.” Australian Financial review, Sept, 27, 2012
  • “Gold has the strongest upside potential of all the precious metals in 2013, despite recent weakness, according to Barclays Capital.” Platts Metals Daily, Dec 31, 2012
  • “Gold has suffered its biggest two-day drop in 30 years as investors flee most financial markets after disappointing Chinese economic data.” Reuters, April 15, 2013

While gold may suit some investors as a modest holding in a diversified portfolio, it is worth reflecting that this so-called safe haven is in fact a highly volatile and speculative asset that generates no cash flows.

Fans of gold point to its 12 consecutive years of gains through until the end of 2012, but the fact is gold delivered negative returns in the two decades prior to that

The chart below shows the inflation-adjusted returns of Australian shares, global shares and gold invested in 1980 up until February of 2013. For the purposes of the exercise, we are using common indices and the gold spot price in Australian dollars.

Shares Vs Gold
Source: Returns Program

So if you had invested $10,000 in the Australian share market in 1980, this would have grown to just under $100,000 today. The global share market, as measured by the MSCI World ex-Australia index, leaves you with a sum of $54,000.

Now, look at gold. Your net return after more than three decades of investing and after adjusting for inflation is zero, nil, zip. In fact, you are slightly out of pocket.

So by investing in gold, you have worn extraordinary volatility, sudden and unexplainable price drops and had no protection against inflation for no return whatsoever.

Some safe haven.

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