Recently, a reader of The Elliott Wave Financial Forecast submitted the following comment about gold as a safe haven, one that we get a lot. So I’ve decided to share Bob Prechter’s recent writings on the topic. First, here’s what the subscriber had to say:
”With inflation advancing around the world and financial turmoil on the horizon, I think gold might be viewed as a safe haven of last resort. Thoughts? – Kevin S."
Robert Prechter, Elliott Wave International's founder and CEO, devoted most of his March 2008 Elliott Wave Theorist to this question. What you see below is only an excerpt; to see all the data and comparative tables in the March Theorist, request a copy from EWI's Customer Service.
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Gold and Recessions
I have often read, "Gold always goes up in recessions and depressions." Is it true? Should you own gold because you think the economy is tanking? Whenever we hear some claim like this, we always do the same thing: We look at the data.
The period of time one chooses to collect data can make a huge difference to the outcome of a statistical study. To give a fairly balanced picture, combining some history with the entire modern, wild-gold era, [we compiled] statistics beginning at the end of World War II. This is what most economists do, because they believe “modern finance” began at that time and that things have been “normal” since then. So our study fits the norm that most economists use.
Table 1 shows the performance of gold during the 11 officially recognized recessions beginning in 1945.
The results speak for themselves. Even though it is accepted throughout most of the gold-bug community that gold rises in bad economic times, Table 1… shows that such is not the case.
Gold against the Stock Market
Of course, it is one thing to say what gold did during recessions, but the more useful question is, “What did it do compared to other investments?” Table 2 shows that the average total return in the Dow during recessions since World War II is nearly as good as that for gold. When modern transaction costs are taken into account for both markets, the Dow actually beats gold during recessions since 1945.
The idea that gold reliably rises during recessions and depressions is wrong; in fact, like most such passionately accepted lore, it’s backwards.
The Best Investment during Recessions
The most important question, however, is not whether the Dow beat gold or vice versa but whether making either investment would have better than taking no risk at all. Table 3 shows that ten-year Treasury notes beat both gold and the Dow during recessions since 1945, and they did so far more reliably.
Of course, as Conquer the Crash (Prechter’s bestselling book about safe investing – Ed.) makes abundantly clear, finding [reliable] bonds in this depression, which will be the deepest in 300 years, will not be easy. CTC forecast that in this depression most bonds will go down and many will go to zero. This process has already begun. This time around, you have to follow the suggestions in that book to make your debt investment work.
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