It is hard to turn on CNBC or read an investment website these days without hearing of Gold as a ‘safe haven’ or ‘flight to safety’ investment. (See here and here as examples)
But following a 2% or so drop in gold earlier today whilst stocks were also down (about -1%), and the general feeling we have that stocks and metals are more closely linked than ever these days, we’re forced to ask, is this really a flight to safety investment? People assume that when stocks go down, the price of gold will go up (because people sell out of their stocks and buy the safe haven investment, driving that price up), but that hasn’t always held true, and certainly not in recent times.
We looked at the 10 largest down days in the stock market between 1987 and the present and found that on average, the S&P 500 dropped -9.03% on these days (this includes the big one in Oct. 1987), and that Gold – that supposed flight to safety investment – actually dropped as well, on average losing -0.89%.
Now sure, Gold held on a lot better than stocks during those market ruts, and one day does not an investment make… but still, didn’t you expect the numbers to be more mirror images than that. Wouldn’t you expect Gold to be up around 5% or so on days stocks are down -9%.
What’s worse – the recent trend doesn’t look good for Gold’s ‘safe haven’ status, either. Consider that in the 10 largest down moves in the stock market since 2008, Gold has also been down, on average (-0.93%). If a bunch of easy money via QE1 and QE2 has been chasing both stocks and Gold higher, it goes to figure that when it comes time to pay that money back, it won’t just go from stocks TO gold, but could go from stocks AND Gold.
We’ll leave you with this bit of wisdom from HB Capital, one of the CTA’s we track…
“Gold soared from $170 in 1975 to a peak of $800 in 1980 and then plunged to $300 in 1982; then languished for 20 years, reaching a low in 2001 at $260. So just blindly buying gold and other commodities [assuming they will rise when markets fall] can be dangerous…”