When markets spiral down, investors have traditionally sought shelter in gold. That faith is misplaced. Research from CNBC shows that when the S&P 500 or the Dow are down 6% in a week, gold trades negative the majority of the time. When the Chinese market is down 10% in a week, gold trades negative about half the time.
Still, gold bugs hold on to the myth that gold is a safe haven. While gold was one of the first metals to symbolize wealth and for many is still viewed as a store of value, there is no reason to believe that gold is a safe haven for the very simple reason that it is anything but safe.
A safe haven is an investment that has very little volatility and the chance of financial loss is small. Think government bonds, A-rated corporate bonds, GICs, high interest savings accounts. These type of investments don’t make a lot of money in low interest rate environments, but there is very little risk unless the government collapses or very large financial institutions declare bankruptcy.
Contrary to this, gold can be extremely volatile dropping $50 an ounce in a very short period of time; that’s not exactly safe.
Here’s what you should know about gold:
The Price Of Gold Does Not Move Based On Supply And Demand
Rather,it moves specifically on the strength or weakness of the US dollar. It doesn’t move based on its own merit. When the dollar is strong, the price of gold drops. When the dollar is weak, investors purchase gold as a hedge. For example, the Federal Reserve’s decision to increase interest rates signals a strengthening US economy. The result: the price of gold dropped on the news.
The Price Of Gold Usually Climbs When There Is Chaos In The World
Perhaps the fact that it is a hard asset and in the past backed national currencies gives people psychological comfort. That comfort is fading. This fall when ISIS attacked Paris, gold didn’t budge.
Gold Is Viewed As A Hedge Against Inflation
That’s because inflation devalues a currency. So when inflation rises and the U.S. dollar falls, for example, the price of gold goes up. However, the years’ long lack of inflation globally is diminishing its perceived benefit on this front.
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