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Gold has long been thought of as a safe haven for investors in the stock market during times of crisis, because it is a tangible asset that is not at risk of becoming completely worthless, unlike stocks and fiat currency which can (and often do) go to zero.
But does the data support this argument? Here’s what we found:
Over the past 50+ years, gold has proven to be a safe haven for investors looking to protect themselves against wild losses in the stock market. Five-year losses in the stock market are not uncommon, with the S & P price index closing lower than 260 days previously on nearly a quarter of Friday afternoons. During these times, gold’s average gain was 135%.
And when stocks go down 20% or more over 5-years, as they have half a dozen times since the 70’s, gold prices have shot up 181% on average over the same period.
In fact, the University of Western Australia studied the global financial system and looked at gold’s role as a safe haven over a 30-year period, and they came to the same conclusion: gold is a safe haven for both US and European stock market investors. (Source.)
Continue reading to discover what exactly is a safe haven asset, and why gold works as a safe haven against the stock market during times of market turbulence.
Table of Contents
Safe Haven Definition
The term “haven” simply means a place of safety or refuge. During stormy weather, ships will seek the safe haven of a port of harbour and batten down the hatches to ride out the storm. So a “safe haven asset” must similarly protect you during stormy weather in the financial markets.
A safe haven asset is one that you expect will either gain in value during times of crisis, or at least retain it’s value, while other asset prices are falling.
Safe havens are either:
- Negatively correlated with other assets — meaning your safe haven assets go up when other assets go down; or
- Uncorrelated with other assets — your safe haven assets retain their value while other assets are falling.
Safe havens are similar to a hedge, in that the goal is to protect your assets, however safe havens are specifically designed to work during times or crisis, political uncertainty, and market turbulence, while a hedge is simply a protection against average market fluctuations.
The Gold Safe Haven Argument
There’s a common saying, “the beauty of gold is, it loves bad news”. While bad news often sends the stock market plummeting, gold has a long history of retaining or even gaining in value. So why does gold act as safe haven against the stock market?
Here are 6 reasons gold protects your wealth while stocks are in free-fall:
Gold is a means of exchange
For thousands of years, gold has been used as a means of exchange for trading within and across borders all over the world. Gold is the universal currency understood by all cultures across all times. While a stock — or an entire fiat currency — might very well go to zero and become worthless, there will always be somewhere in the world where your gold is highly valuable and liquid.
Gold is a store of value
Gold has a reputation as an immutable store of value, partly because it is intrinsically rare, and partly because of the emotional and cultural ties we have developed over millennia. No matter what is happening in the stock markets in the US, people around the world are buying and selling gold.
Currency values were once directly linked to gold
The value of gold as a safe haven has been further reinforced by the gold standard system, which directly linked the value of currencies around the world to gold. While the gold standard is no longer in place anywhere in the world, the cultural links are still strong, and the perception of gold as a safe & secure asset is common among consumers.
Gold has intrinsic value
If your shares go to zero, their value is the paper they are printed on. (Zilch!) Gold on the other hand has intrinsic value thanks to it’s many uses throughout the economy, from dental fillings, industrial and scientific applications, to it’s most common use, jewellery.
Central banks buy and hold gold
Even though the gold standard is no longer used, central banks around the world continue to buy and hold gold to protect the value of their currencies. In fact in the past few years the US, Russian, Chinese, and Indian governments have been rapidly increasing their gold stores. (See also: Why Billionaires are Buying Gold in 2019.)
Gold is simple to understand
When the stock markets are falling and investors are overly cautious and scared to make poor decisions for fear of losing it all, gold is a simple asset to value and understand. This makes it an attractive investment, which in turn helps to keep the price steady or rising against falling stocks.
Gold As A Safe Haven In 2019
The data clearly shows gold is a safe haven to protect your wealth from stormy wealth in the stock market. However it’s greatest strength might come not from protection from any single asset class, but by immunising you against systemic risks of the market, namely a monetary system based on an inflated and shaky US dollar.
Think of gold as your insurance policy against the worst case scenario of a complete market collapse.
The Next Steps
To learn more about investing in gold — not just as a safe haven or for portfolio diversification — but as a means to successfully outperform the market and dramatically increase your wealth during the coming bear market, be sure to request your free gold kit from Regal Assets.