Is gold still a safe haven?
Can gold really act as a safe haven during political or financial crises?
This issue has come into focus in 2018 because bullion has failed to deliver so far, even as world stock markets have struggled to reclaim January’s record highs, while tensions with Russia reached Cold War levels.
The oil price has meanwhile jumped amid worsening Middle East violence. Yet gold has now fallen year-to-date against all major currencies except the Swiss Franc – another “safe haven” asset which is no longer performing as investors might hope.
Fool’s gold?
Given that gold offers no yield or earnings to study, let’s forget what the Financial Conduct Authority says about not considering past performance. Indeed, where gold is concerned, only history can really offer a guide.
Reviewing gold’s track record, Neil Mellor at Bank of New York Mellon points to the 1973 Yom Kippur war, when gold fell 30 per cent that October from its pre-crisis peak.
Gold also retreated when Russia annexed Crimea in 2015, and it sank when the Eurozone put Cyprus into financial lockdown in spring 2013.
Against those failures, analysis from the mining-backed World Gold Council points to a range of other crises – including Black Monday 1987, Al-Qaeda’s attacks of 9/11, and the Great Recession of 2008-2009.
The analysis shows that a five per cent allocation to gold would have boosted a diversified portfolio’s performance by 75 to 250 basis points during each event.
And yet, investors are asking a lot of gold if they expect it to protect them during a political crisis.
Gold’s big top in 1980 came as Russia invaded Afghanistan, while the asset’s all-time high came amid the English riots of 2011.
Despite the rallies, owning a little yellow metal offered no defence, because both those events also coincided with significant stress in financial markets.
Rather than looking at gold’s performance during isolated events, let’s query gold’s performance as financial insurance by tracking its action against losses in the stockmarket.
Heads or tails
According to short-term historical data, gold has no power for offsetting falls in equity week-to-week.
Across the past 45 years, gold (priced in the dollar) rose 51 per cent of the time when the S&P 500 index rose. And it rose in 53 per cent of those weeks when the S&P fell. Essentially little better than a coin toss.
Judged on longer time frames, however, the metal does show a “safe haven” function, and increasingly so when stockmarket losses worsen.
Analysis since 1973 shows that over the space of a year, when the US stockmarket had fallen, the price of gold over the same period had risen 68 per cent of the time.
This pattern is clearer still for five-year periods, with gold rising 59 per cent of the time when the S&P gained, but rising fully 98 per cent of the time when the stockmarket had dropped.
Pricing in the pound
Currency fluctuations mean that gold’s performance for sterling investors has differed, but the broad point still holds, with gold acting to offset poor performance in UK shares across longer time frames.
Priced in sterling, gold has gained in seven of the nine years since 1971 that the FTSE All-Share index lost value on a total return basis.
That includes all five years that saw equity values fall by double-digits, with gold averaging a near 40 per cent annual gain.
Goldfinger
Taking the long view, how much gold is enough to benefit from this track-record of hedging stockmarket losses?
For any individual investor, buying a lot of gold suggests a bet on very bad things happening.
As a Bank of England officer briefs 007 in Goldfinger, “fear, Mr Bond, takes gold out of circulation and hoards it against the evil day”.
But by the same token, buying a little gold suggests more of an insurance policy – a defence, just in case other things fail to perform.
One large trust client of BullionVault today holds a little over one per cent of its financial assets in gold. However, among our retail clients, it’s common to have a five to 10 per cent weighting.
Above that, you may risk the dreaded “gold bug” tag. And as Charles Stanley’s Garry White noted in City A.M., those private investors who do pile up gold rarely sell in times of stockmarket trouble, when the gold price is usually high.
If gold is to act as insurance rather than a safe haven, make sure you run to it only once trouble has started, buy early, and don’t forget to take profit.