Gold as a Safe Haven Investment

Gold has started looking mighty appealing to worried investors over the past two months. The Dow Jones toppled by 504 points Sept. 15, the largest drop since after …

Gold has started looking mighty appealing to worried investors over the past two months. The Dow Jones toppled by 504 points Sept. 15, the largest drop since after the terrorist attacks in September, 2001. Just two days later, Sept. 17, the Dow fell by another 450 points, leaving Wall Street stunned and anxious. Directly following the second drop, “[t]he price of gold broke its record for the highest increase in a one-day period,” according to Spiegel Online International.

Traditionally,gold has been viewed as a safe haven in times of economic crisis, and that belief is making itself evident in the recent demand increases the gold market has seen. At the end of September, in the wake of the crisis on Wall Street, the U.S. Mint was forced to suspend sales of the American Buffalo 24-carat gold coins because it had run out of inventory. Only a month earlier, the Mint had also temporarily suspended sales of the American Eagle one-ounce gold coins, and had later made them available again through an allocation program to specific dealers. Leading up to the suspension of sales, the Mint had sold 164,000 American Buffalos, an increase of 54 percent from a year prior, according to the Associated Press.

At the end of August the Rand Refinery in South Africa, which produces the 22-carat Krugerrand, ran out of the gold coins after one large order from Switzerland, according to ResourceInvestor.com. The refinery was working to increase its output from 10,000 coins per week to 15,000 to 20,000 coins per week to keep up with orders, according to the article.

“We’ve seen very strong coin and bar demand, and very strong demand for gold ETFs, which indicates increasing nervousness,” Natalie Dempster, head of investment, North America for World Gold Council, said. “That’s certainly indicative of the amount of fear in the market just now.”

Some of gold’s appeal is the idea that it can act as a fiat currency in the event of an economic collapse. If this is what investors want, investing in small coins may be their best bet in the interest of simplicity and peace of mind. The main downside when buying gold coins is that a premium is added to the coin’s value, and these amounts change depending on demand for the coins. In the current economic climate, these premiums are soaring. On eBay, one-ounce Krugerrands and Maple Leafs are going for up to $260 over spot price, according to Paul Joseph Watson on PrisonPlanet.com.

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Gold bars, on the other hand, may prove to be less liquid than investors thought when the time comes to cash them in.

“If you take bullion on delivery and bring it home—use it as a doorstop or whatever—when you bring that back and try to sell it, it’s not that easy. You have to get it assayed and all that,” said Stephen Platt, senior account executive with Archer Financial Services. “Trying to get that bar to someone who will take it and approve it [can be difficult], and given the high prices they will be more careful.”

So is gold the safe haven that so many investors seem to believe it is? That may be debatable.

“Gold can go up when the stock market goes down, but I’ve also seen it go down when the stock market goes down,” Platt said. “People try to make some kind of grand assessment of the gold market being able to protect you. I think you have to look at it as a commodity, but recognize that it does still have some monetary significance.”

And before running out to join the other panicked investors in their gold sprees, investors should also take note that the gold market has been increasing in volatility. At the end of Q3, the yellow metal’s volatility was at 39 percent, according to the World Gold Council’s Gold Investment Digest. Though this is high for gold, it was still less than some other commodities, such as silver (82 percent), platinum (75 percent) and oil (63 percent), according to the report.

“Gold price volatility has increased to high levels for gold, but that’s sort of inevitable given the current situation,” Dempster said.

Interestingly, gold’s market price hasn’t skyrocketed despite the catastrophe on Wall Street and reports of increased demand. It continues to hover in the $700 to $800 range, though logic would suggest that it out to be climbing up over $1,000 per ounce in light of the problems attacking the economy.

This may be because “[g]old is gold, paper is paper, and ‘Comex gold’ is nothing but paper masquerading as gold while simultaneously pretending to be the price-setting medium for actual gold in the world,” according to Alex Wallenwein of The Market Oracle, a U.K.-based financial markets analysis and forecast. “Meanwhile, real investors in real gold are enjoying their shopping spree—except that the spree turned into a treasure hunt as the shelves and display cases of gold dealers look more and more like the supermarket shelves in the old Soviet Union—bare.”

But “really the price in many ways doesn’t matter for a safe haven investor,” Dempster said. Instead, Dempster said she advised that investors simply allocate a small portion of their portfolio to gold and leave it alone rather than trying to outsmart or perfectly time the market.

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