Did gold really disappoint as a “safe haven”?

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A question by Julian Phillips :  Once described by George Soros as the “ultimate safe-haven” before saying it was a “disappointing safe-haven”, asks if gold’s safe haven status has been tested yet.?

Answers

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What is a “Safe-Haven”?It should be defined as a long-term investment that holds its value internationally, in extreme financial times. Is gold one of these? After all, it has fallen from $1,921 at its peak to $1,344 at its trough. This is a 30% fall over the last year plus. At one time George Soros described gold as the “Ultimate Safe-Haven”, before saying it was a “disappointing Safe-Haven”. Alan Greenspan described gold as being “money in extremis.” 

Anonymous

“In the “Bear Raid” we have seen over the last fortnight when gold was smashed down $200 after declining $100 before that, the physical gold sales came almost exclusively from the SPDR gold ETF before being accompanied by a massive 400 tonne gold short on COMEX. In addition, two large U.S. banks, Goldman Sachs and Merrill Lynch appeared to act ‘in concert’ to ensure the raid was successful.

Until this year the holding of the gold ETFs did not move except slightly as its shareholders were long-term investors not traders in the gold price for profit. They hold gold for wealth protection in the long-term. 

By long-term we mean just that. In India for instance gold is passed down from mother to daughter through the generations. There, gold is used as collateral for loans and usually not sold. Some sell when the price is what they consider too high, but sold with the intention of buying back on a price retreat.

Seriou’s gold investors take their savings and financial successes and put them in gold to weather the storms we have seen over the last century. Europe in particular has done this and survived two World Wars and two currency collapses, so far in the last century, provided they held their gold in Switzerland.

These long-term gold holders agree with Alan Greenspan that gold is held for extreme days. 

But into the SPDR gold ETF came traders who wanted to hold gold until the price rose, so they could make a ‘profit’. Hedge funds and names like George Soros were among these. The very nature of their investment attitude was different from those we have just discussed. When they bought gold, it was in the expectation of a currency crisis in the dollar. If they had bought it as a “Safe-Haven” they would not have sold. It was bought as a short to medium term hedge against a dollar collapse. This did not come. “

Anonymous

The Dollar Collapse Didn’t Come Because the dollar has not collapsed has in no way discredited gold as a “Safe Haven”. It remains one.

We must point out that if a dollar collapse had come, gold would have acted as a “Safe-Haven” and retained its international value and risen in the dollar. Because it did not come, gold did not fail as a “Safe-Haven” because it was not tested as one. What has happened is a successful “Bear Raid” which gave such investors the profit they wanted.

You may well reply, “but the fall in the gold price of late defeated it as a Safe-Haven.” Not so! Take a look at the seventies performance of the gold price and right through to the year 2000.”

Anonymous

Gold through the Last 45 Years

Between 1968 and 1980, gold rose from $35 an ounce in 1968 to $195 an ounce on December 27, 1974, only to fall back violently to $103.50 an ounce on August 25, 1976. 

This represented a 43.4% drop in price during this period. Twenty months of price declines were too much for most gold investors, and many exited vowing never to return. Then it reversed and continued to climb right up to $850 over the next three years. Then the U.S. in conjunction with developed world central banks mounted an attack on the gold price through an acceleration of the production of gold, by financing mining operations with leased bullion and threatening the market with gold sales. Then the venerable Mr. George Brown established the “Brown Bottom” in the gold price at $275, just before its 10-year rise through to $1,921. Now take the long view from the date it was $35 at the end of the sixties. Even now at $1,400 it has risen 40 times in 42 years. I would call that a “Safe-Haven”! 

Two features are worthy of note when considering whether gold will fail to hold its price, long-term: Firstly, even if they wanted to accelerate gold production, it can’t happen again because the easily-mined gold resources are used up. Secondly, inflation in the mining industry has pushed the price at which it is profitable to mine gold on average on a third of world gold mines to over $1,100 (allowing for a small profit only). So if prices were to fall lower than the bottom of $1,344 a substantial proportion of the world’s gold mines would become unprofitable and would be closed. This would reduce supply considerably. Figures of a drop of 900 tonnes to 1,900 tonnes are possible. 

Forty percent of the world’s gold supply comes from what is termed “scrap sales.” This represents around 1,600 tonnes annually. The bulk of this scrap supply ceases when the gold price falls substantially, leaving the market mainly supplied by newly mined gold. 

Hence the ‘natural’ fall in supply to the market would force the gold price back up to well over $1,400 and with central bank demand alone taking the gold price, much, much higher.”

Anonymous

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