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Is Gold really a safe haven in times of crisis?

Commodities / Gold and Silver 2011 Sep 23, 2011 - 11:24 AM GMT

By: Sam_Chee_Kong


Best Financial Markets Analysis ArticleThe price of gold varies inversely with certainty. The more uncertain the environment, the higher the price of gold because people will scramble for gold as a hedge against uncertainty.  However, certain events for the past two weeks have baffled many of us. A couple of  weeks ago, when Switzerland pegged its CHR (Swiss Franc) at 1.20 to the Euro, it immediately devalued its currency by about 8%. Since then, the Swiss Franc often viewed as the safe haven among other currencies, has lost its luster.

After having one less competitor for safe haven, the price of gold will supposedly rocket up, instead it went down about $50 when the news hit the streets. Again, over the last weekend, rumors are circulating of a probable Greek default by last Sunday, again the price of gold again closed down more than $40.The main culprit being the huge rebound of the US$ over the weekend. It spiked from 73 to 77 on the US dollar index.

The problem is, if the whole of SEA or Southern Europe collapses and so does the Euro, people will again look for an alternative safe haven currency and it will be the US$. When economies collapse, people will be scrambling for gold and hence will push its price up. At the same time institutional and hedge funds will be scrambling to buy US Treasuries as a safe haven and will eventually push up the US$ due to its demand. So, what will it be of the price of gold, when at the same time, its competitor (US$) is also gaining confidence?

A good example is during the last financial crisis in 2008, the price of gold despite being a safe haven went down from more than $1000 in March to about $700 in October.

Whereas, the US dollar index jumped from a low of 70.70 in March 2008 to 87.80 in October 2008.

At the same time the Dow Jones (DJIA) was at 12500 in March 2008, before it went down to 8300 in October 2008.

So what does it mean? It shows that people are abandoning gold during the darkest days in the financial markets. They should be accumulating gold when financial markets collapse. Instead, the US$ once again proved to be the choice for safe haven.

In view of this, I am uncertain whether the arguments - gold demand equals fear demand and also gold provides the best hedging against currencies and economies dislocations still holds?

Can someone please provide an insight into this?

by Sam Chee Kong

    © 2011 Copyright  Sam Chee Kong - All Rights Reserved

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Just trading for a living
23 Sep 11, 22:08
catchphrases and soundbites

When gold goes up, there are more buyers than sellers. Period.

When gold goes down, there are more sellers than buyers where market is too long with weak holders of gold. Period.

When USD goes down, there are more sellers than buyers.

When USD goes up, there are more buyers than sellers where market is too short with weak holders who are short of USD. Period.

Trying to describe what goes up and what goes down with catch-phrases/sound-bites in any market are mostly the job of "analysts" and "strategists" who do not trade for a living and thus have to justify their job with "opinions" and "writings". Each time I hear catch-phrases or sound bites like "safe-haven", "contagion", "green shoots", "twist", etc my hairs stand on their ends! For that matter, even a catch-word like "transitory" that is uttered by a clueless academic chairman.

These people doen't have any idea how a market works. It is a jungle out here in the markets and nothing is safe, or unsafe if you know where to look for it. Just like in the real jungle of Tarzan.

24 Sep 11, 01:39
Gold Safe Haven

I think you are being too simplistic, in that not all "Safe Havens" are the same, nor for the same reasons. The Swiss Franc was a haven due to confidence in the integrity of the people who print it - lost when they pegged it to the Euro, and Europe overall, which is clearly in trouble. The $USD, on the other hand, is a haven (solely) due to the fact that it is still the world's Reserve Currency - DESPITE the glaring irresponsibility, and lack of integrity, of the system churning it out. This is a helluva big difference - think about it.

And then consider gold - also accepted world-wide - pegged neither to any currency, nor to any political locality, system nor anybody - it has no counterparty risk of any kind - yet clearly this is not (yet) appreciated by the vast majority, with wealth to protect. I contend that your example of fleeing Swiss Franc-holders not swapping en masse for gold is presumptive evidence of exactly this. (Though there have also been reports of Switzerland threatening the security of gold holdings, there.)

As for the performance of gold and The Dow against the $USD, you cite 2008 drops from 1,000 to 700 for gold, and 12500 to 8300 for the DJIA: both down by (at least roughly) 30%. But consider what happened NEXT. In the case of gold, all of it (and more) was regained the very next quarter - by March 2009 - never to go below the high-800s, since then. Even with all the recent drop, it's still up a solid 60% from back then.

Meantime, what did the $USD ACTUALLY do, over the same two years? This question is simply not answered meaningfully by this dubious DX, compared to REAL PRICE INFLATION - misrepresented by yet more dubious US CPI numbers - to get past which go to such as, who has been reporting REAL inflation of (again roughly) 15% in each of 2010 and 2011, here in the USA. Americans need only look at the price of gasoline, for example - and "while your mileage may vary" (pun fully intended) - here in the US that's essentially a 30% inflation since late 2009. So, for us to see PMs and/or the stock market lose about this same percentage against the $USD is simply a deflationary recapture of the dollar's purchasing power (of these two items, anyway) enjoyed in 2008.

But, again for gold, subtract the above (again, very roughly) 30% from its gains since 2008 and you are STILL up a solid (at least) additional 30%! That, I believe, is A TRUE market appreciation - growth in demand - for gold as safe haven. To be followed - again in short order, just like back in 2009 of course - by tremendous surges, as the $USD resumes its downward spiral towards finding its intrinsic value - all floating, unpegged fiat paper numbers, with which we are constantly showered, notwithstanding.


-Matty in Florida

24 Sep 11, 04:48
Gold Price Manipulation

The movements in the gold price over the last few days have indeed been curious, but not without recent precedent. We know for a fact that JP Morgan periodically shorts gold to drive the price down, make the USD look better; to deter speculators and frighten the general public off from getting into physical gold. This looks like just another one of their stunts to me, since gold should (given the current backdrop) be pushing 2K/oz by now and reaching record highs in all major currencies. The fact that it isn't doesn't accord with the grim economic facts.

24 Sep 11, 10:21
gold liquidation

Gold is getting liquidated along with everything else right now to cover losses and raise cash...a wiff of deflation fear in the air once again. It won't last...we are in recession already and the money printing machines are gearing up once again. Europe will probably be next and has already started with the devaluation of the Swiss Franc. Now they desperately want to discourage anyone from buying gold. They want to destroy all safe havens so that everyone will be forced to buy up all the paper. In the long run they will fail and gold will resume it's upward trend. Once Greece finally defaults and reintroduces the Drachma or the ECB buys up all their worthess debt the markets will cheer and the money printing can begin again at a much faster rate!

(If you have physical gold in your hand would you really trade it for a piece of paper backed only by someone elses debt?)

Onc' Scrooge
24 Sep 11, 11:30
Who abandoned gold?

Hi Sam,

I think that you have to make differences between what you call "people" abandoning gold.

I think there are in the market:

a) "hot" speculators working with credit in futures markets with "paper-gold" and also stocks etc.

b) institutionals like Hedge-Fonds, Banks, ETF's .. doing the same with "paper-gold" for their clients

c) institutionals Bank's and ETF's investing physical for their clients and stocks, bond's etc.

d) private physical investors

Who has abandoned gold (and silver) the last days ?

Beginning by the a)-people having lost control in their investments with the last week stock movements selling paper gold to cover other losses producing a gold tumbling down which hits other a)-people who where caught by their own margins and sold also producing some margin problems to some of the b)-people. Some other of the b) and c)-people had big problems with their liquidity (european banks (french one's), who had to cover $-losses made by US-investors who have called their money back, Japan also needs urgent liquidity ...) selling also paper and some physical to cover urgent liquidity holes. Everyone of these people influenced the others to sell more with the falling price. And also the paper shorties of the CRIMEX gave a hand.

But all this was mostly produced by paper sellings - nearly no physical was sold.

Even better: We have very high demand of d)-people trying to catch some ounces in physical at a dip price.

(Witnesses in US: Sprott is out of silver, In Europe: a lot of gold shops have closed with stock disruption ..)

What you see is the beginning of the breakdown of the paper gold system - I think that if deflation crisis goes further the (paper) gold price could go down even near by 0. Imagine if the deflation crisis which we see now goes worther and everybody wants to sell his (paper) gold it would be worth nothing! But in a given moment before or after the breakdown of the paper gold price - the price will splitt into paper and physical one near 0 and the other high - this is already beginning.

If we would get a inflationary crisis both prices will go high up to the moment when paper gold owners wants physical then the paper goes to 0 and the physical will skyrock.


Onc' Scrooge

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