If your house catches fire, do you call your insurer before trying to escape the flames...?
So Gold is not a "safe haven" - that's the genius insight many pundits are pushing today.
No one watching gold's ups and downs over the last decade's five-fold gains would claim otherwise. But fair's fair. The price has slumped 11% this month, even as stock-markets and the economic data tanked, making Sept. 2011 the worst month since the wipe-out of Oct. 2008 after Lehman Brothers collapsed.
How come? Wasn't a banking crisis, plus the threat of a government default, supposed to be good for gold? Well, just like 3 years ago, the problem with a banking crisis - and the accompanying stock market crash - is that it forces money to flee the futures market. There, speculative traders can bid up (or push down) the price of gold in the future, using borrowed money.
So just as Lehmans' collapse meant there was no money to be borrowed (a major investment bank vanished, you'll recall), so this latest credit crunch has destroyed gold-futures demand. That of course impacts the price of gold for today. But it has only seen demand for physical gold surge yet again. And why is that growing handful of people choosing to buy physical gold? Because it's long-term insurance, not a short-term safe haven.
September's drop has certainly hurt August's buyers. But you wouldn't expect your insurer to pay out the moment your house catches fire. To flee the flames you'd take the fire escape, not call StateFarm. And just like good insurance, gold's defensive value pays out over time, not day-to-day. Provided you remember to pay your premiums in good time.
Sources: LBMA, DMO, WSJ, Yahoo, LME, EIA, BoE
Yes, gold got whacked in September 2011. But across the whole summer's mayhem, it beat every other asset class hands down. The only other winner was government debt - that classic knee-jerk safe haven, now yielding less than inflation for three years running and uniquely exposed to the only policy options left open for fixing the debt crisis: default or devaluation.
This latest phase of the crisis, however, guarantees volatility in all markets, and anyone considering gold today must understand that it's physically secure but financially exposed to very sharp price swings. This is not news. For UK gold owners, for instance, September's fall was only the worst drop since January, and it has dropped 5% or more in eleven of the last 120 months since this bull market began. This latest "wipe-out" is par for the course, so far.
No one can (or should) promise new buyers that gold will now repeat its 120% gains of the last 3 years. But the long-term case for owning gold only looks stronger the worse this crisis becomes.
And if you're tempted by government debt in the meantime, just remember to get off the fire escape steps before they also catch fire.