According to a February 10 Reuters article, the global economic recession now has a literal "golden" lining: One Japanese jeweler's '09 collection of "Lucky Dolls" -- solid, 24-carat gold figurines that, according to tradition, are able to "ward off evil spirits and herald the coming of spring."
Small world. Mainstream financial wisdom makes a very similar claim; roughly: He who invests in GOLD shall avert the pain of economic uncertainty and unrest. In light of the current market maelstrom, this belief has never been stronger, as these recent news items make plain:
- "Bullion Sales Hit Record In Stampede To Safety. Inflows into the world's largest gold-backed exchange traded fund surged to all-time high in January… amid renewed fears about the health of the global financial system." (Financial Times)
- "…Known for its durability during a slowing economy, gold prices and sales have been steadily rising." (AP)
- "Gold Rush: Investors are buying gold… rather than looking for a quick gain. This is a new round of safe haven buying." (Bloomberg)
Not so fast.
Sure, the usual pundits tout gold as the ultimate safe-haven TODAY, when prices stand at a six-month high. Back in October 2008, however, with gold prices 30% in the red and hobbling at a one-and-a-half year low -- they shunned the metal as a certain casualty of the credit crisis.
To wit: "Gold prices plunge on recession fears. Confidence is at rock bottom. No one wants to be long any commodity." -- October 24, 2008, Bloomberg.
Really, these folks see gold as a surefire safe-haven when prices are rising; and NOT as one when prices fall. That's a recipe for disaster.
As for whether the precious metal TRULY does provide shelter from the economic storm, the March 14, 2008 Elliott Wave Theorist has the answer. In that publication, Elliott Wave International president Bob Prechter presented 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.
Bob 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.
In Bob'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."