Gold Safe-haven Status is Based on Hype Not History

Commodities / Gold and Silver 2010 Mar 09, 2010 - 05:46 PM GMT

Best Financial Markets Analysis Article Gold: Best Supporting Role In Economic Downturns? Think Again

As I sat down to watch the Oscar pre-show on Sunday night, March 7, one word was repeatedly used to describe the celebrity starlets and their designer duds: GOLD. Gold bustiers and gold lame skirts, shiny gun-metal dresses and glittery sequined gowns all basking in the golden shadow of the final golden statue.

Everywhere you look, from the Red Carpet to Wall Street, gold is definitely in "fashion." As for why, one word comes to mind: safe-haven. See, according to the mainstream financial experts, the more unstable the global economy, the greater the appeal for the precious metal.

And, with a staggering 17% unemployment rate in the United States, alongside slumping real estate sales, Eurozone weakness, the Greece debt debacle, and so on -- the only thing going up is gold's supposed disaster premium. Here, take these recent news items for example:

"Bullion Sales Hit Record In Stampede To Safety." (Financial Times)
"Gold Ticks Higher On Safe Haven Buying. The risk trade is resuming." (AP)
"Gold Rose to 6 ½ Week Highs as the metal benefits from fears over financial instability in general. The market is looking for some security with gold." (Reuters)
"Gold Rush: This is a new round of safe haven buying." (Bloomberg)

There's just one problem: The correlation between a falling economy AND rising gold prices is based solely on hype, NOT history.

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Case in point: In the March 2008 Elliott Wave Theorist (republished in his 40-page Gold and Silver eBook), Elliott Wave International President Bob Prechter presents an indisputable case AGAINST the safe-haven status of gold.

The first piece of evidence: The following table showing gold's performance during the 11 officially recognized recessions beginning in 1945.

Behavior of Three Key Markets During Recessions

Prechter also plotted the Dow Jones Industrial Average into the same period and made this startling discovery: The average total return for the Dow during recessions since 1945 is 6.89%. Taking into account modern transaction costs, the Dow actually beats gold with a 6.87% return.

The most powerful myth-debunking punch of all, though, came via the second chart of gold's performance -- this time during periods of financial growth.

Behavior of Three Key Markets During Recessions

In Prechter's own words:

"All huge gains in gold have come while the economy was expanding… The idea that gold reliably rises during recessions and depressions is wrong. In fact, like most such passionately accepted lore, it's backwards."

Now, this doesn't mean that you shouldn't own gold in a financial crisis. On the contrary: In chapter 22 of his Wall Street Journal business bestseller, Conquer the Crash, Prechter lists 5 reasons why "you should buy gold and silver anyway." Gold is "real money," after all! It's just that, despite widespread beliefs to the contrary, you shouldn't expect "huge gains in gold" when the economy contracts.

Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

Comments

joek
10 Mar 10, 14:23

strange analysis

why do you compare periods of gold standard and non-gold standard? 1971

that's completely different money - comparing apples and oranges. Anything you show is just devaluation of dollar

gold was stable - just a yellow brick.

every company in DOW was replaced by another. That's not the same DOW.

DOW of 1945 is bankrupted long ago. people lost money

And what is about gold pre-1945? There is 5000 years of history before that.

American economy is just a small pimple in history

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