Why Gold Has Utterly Failed as a “Safe Haven”

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Why Gold Has Utterly Failed as a "Safe Haven"

Brett Arends of Market Watch has a great article entitled, “Why gold has utterly failed as a ‘safe haven’ .”

My own analysis of gold – looking at gold objectively based solely on its historical performance statistics – suggests that the optimum asset allocation to gold is zero.

Arends argues the same point. Here are some of his highlights:

  • “I’ve run the numbers using data from FactSet, and if you’ve bought gold bullion at any time since it began trading freely in 1975, you’ve lost money over the following 12 months about 45% of the time. That’s right: Nearly half the time, gold has fallen in price year-on-year.”
  • “If you’ve held on for longer, it hasn’t helped much, either. Gold has lost value 41% of the time over three years, and even 34% of the time for five years. Someone buying gold and hanging on for five years has lost money a third of time. And that’s in purely nominal terms — before counting inflation.”
  • “Gold lost 23% of its value during the 1980s, even in nominal terms, before counting inflation.”
  • “Gold lost 29% of its value during the 1990s, also before inflation.”

Properly speaking, gold shouldn’t even be called an investment. “Investment” describe something that pays you money. Stocks are an investment because future earnings pay you back in dividends. Bonds pay interest. Rental properties collect rent. Gold doesn’t appreciate enough to give you a return. It is more accurate to call it a store of value.

A safe haven should appreciate at least by inflation and have a very low volatility. With high volatility and low levels of appreciation, gold doesn’t satisfy either of those criteria.

Photo used here under Flickr Creative Commons.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.