# Why is gold a safe haven investment?

To me, it seems like gold is the ultimate example of something where the value should go down when the economy, stock market etc go down.

Just like Ferraris, and other frivolous consumer luxury goods, gold has almost no inherent value, beyond what we choose to assign to it. If the economy plummets, people will buy considerably fewer products that are made of gold, much like they will buy considerably fewer Ferraris.

Why does gold's value increase when times are tough? Why do we not see trouble on the stock market lead to increased prices for consumer essentials such as grains, textiles etc - things that have almost no change in demand when there is a change in income because they have real value (stopping people dying).

Note: Answers should be appropriate for countries that have left the gold standard. If there are any countries still on it, answers for those countries aren't what I am looking for.

• Gold's value derives from its scarity. It is different from Ferraris because gold is universal and its amount is relatively stable despite man's efforts while Ferraris's prudction is controlled by a single company and its amount can in fact flucuate if the company decide to lower its price and produce more of it. – Kun Feb 11 '16 at 2:00
• Maybe gold's value increase because its demand spikes during tough times as people view it as an safe alternative to invest. – Kun Feb 11 '16 at 2:01
• Kun is pretty much right and, in my opinion, should have made his comment an answer. Gold, as any "rare" resource, is expected to save its value in the future, so it can be sold tomorrow for a good value. However, it should be noted that the value of gold has been on a steady declining trend since 2011 (1800 USD/oz => 1200 USD/oz), so it's far from being an effective value-saving good. – John L. Feb 11 '16 at 12:46
• Well I don't know if many people expect the Ferraris stopping to be scarce soon. I would say the main difference is that gold is (to my knowledge) highly durable, whereas cars are not, or they require significant maintenance costs. – Ululo Mar 9 '17 at 9:08
• @ Kun, John. Maybe I am missing something. Is Kun's comment not essentially "gold is a safe haven asset on day x because it was a safe haven asset on day x-1"? It had to start some time, and for some reason. I want to know the original reason gold became a safe haven asset, not why it continues to be seen as a safe haven asset, now it already has that reputation. – Scott Mar 9 '17 at 23:44

You could see it as a coordination game and an example of a rational bubble. Because everybody knows that people start buying gold and the price goes up when the economy tanks, it is actually a good strategy to do just that. Similar things happen for example with the Swiss Franc.

The idea that the stock of gold is fixed and hence its price is stable, is empirically just plain wrong.

First, gold production varies with production cost and the demand for gold, just as in other industries. It is also dominated by a couple of countries and big mining companies with tons of market power.

Second, the price of gold is highly volatile, just as other commodities. The standard deviation of gold prices is much higher compared to for example Treasuries or G7 countries' equity indices.

• This answer, whilst likely correct, just moves the question further back in time. It does not answer how gold started to be viewed as a safe haven investment. – Scott Mar 8 '17 at 22:38
• I would view it as case of multiple equilibria, so it's hard to talk about causality. If market participants coordinated on using something else as a save haven asset, it could in principle serve the same purpose. – Tobias Mar 9 '17 at 11:28

Gold is safe-haven investment for mainly two reasons:

1. It is a scarce resource.

This alone would not explain why other scarce resources aren't good stores of values. The second reason is:

1. It has the highest Stock to Flow Ratio of all commodities. The new amount of gold produced every year is only approx. 2% of the gold already in circulation. And producing more than that is difficult. Even if gold appreciates, therefore there's not enough influx of new gold to lower the price. Gold in circulation never runs into a real "shortage", like with many other commodities where demand increases production of supply to reach a new balance.

On top of these, due to the physical characteristics of gold (durability, scarcity, compactness, divisibility, malleability) a consensus on the perceived value of gold emerged during centuries. Therefore, as others said, a cultural and historical component is rooted in its store of value nature.

There is empirical research that the price of gold is linked to the planetary level of combat. A large amount of wealth can be transferred into a small mass making it easy to transport. Because the planetary supply of gold is approximately fixed and very small, it reacts sharply to demand shocks. Gold functions as an alternative currency. It is a good medium for it because it has limited industrial value. In essence, because it is useless for most purposes, other than jewelry it is a good choice. Jewelry makes gold even more valuable and makes it easy for people to wear their wealth as is common in third world countries. Coins and bricks really are inconvenient particularly when fleeing.

The secondary use is between nations to settle debts. It still happens, rarely, but it still happens. Although the gold standard is gone, gold is still something that can be exchanged. It doesn't require physical transport as long as you trust the central bank that is storing your gold.

Gold seems to have supplanted other monies, such as salt or wheat because it is useless. Your question could equally be asked about Yap money, which is still in use or wampum. You can find more on stone money at http://www.npr.org/sections/money/2011/02/15/131934618/the-island-of-stone-money

Consider legal tender as a commodity. Gold is usually seen by some of the market as a substitute for a strong currency. If your currency is really strong and can buy lots of cool things, why store your value in gold when there's perfectly good legal tender that can be accepted everywhere? That is why I claim strong currencies and precious metals are substitutes. But for example, if the dollar is weakening compared to other international currencies, some people flock to precious metals and later, when the dollar is very weak, sell off the gold at a better rate for the dollar back, before the dollar strengthens again.

So a combination of these things means that often we see economies with weak currencies facing hard times, and usually a country with a weak currency got that way because of bad economic fundamentals in the first place (e.g. high inflation, currency devaluation). Since gold is a substitute for strong currencies, it makes sense that the price of gold rises as the currency becomes weaker, which usually happens during a bad economy, and more people want to buy gold.

I want to provide a different perspective to those already presented, which is that of culture. As you say, gold has almost no inherent value (at least it had little in the past, before the invention of electronics). However, cultural norms and customs give value to gold.

An interesting example comes from 500's year old book Utopia, by Thomas More, which describes an "ideal" (some might say totalitarian) society, without scarcity, poverty, conflict, et cetera. This society disregards gold (and silver, diamonds, etc), partly by associating gold with slavery.

The context of the quotes below is that of a traveler who spent some time in Utopia, and describes such society to the reader. The quotes in extenso (emphasis mine):

It is certain that all things appear incredible to us in proportion as they differ from known customs; but one who can judge aright will not wonder to find that, since their constitution differs so much from ours, their value of gold and silver should be measured by a very different standard; for since they have no use for money among themselves, but keep it as a provision against events which seldom happen, and between which there are generally long intervening intervals, they value it no farther than it deserves—that is, in proportion to its use. So that it is plain they must prefer iron either to gold or silver, for men can no more live without iron than without fire or water; but Nature has marked out no use for the other metals so essential as not easily to be dispensed with. The folly of men has enhanced the value of gold and silver because of their scarcity; whereas, on the contrary, it is their opinion that Nature, as an indulgent parent, has freely given us all the best things in great abundance, such as water and earth, but has laid up and hid from us the things that are vain and useless.

“If these metals were laid up in any tower in the kingdom it would raise a jealousy of the Prince and Senate, and give birth to that foolish mistrust into which the people are apt to fall — a jealousy of their intending to sacrifice the interest of the public to their own private advantage. If they should work it into vessels, or any sort of plate, they fear that the people might grow too fond of it, and so be unwilling to let the plate be run down, if a war made it necessary, to employ it in paying their soldiers. To prevent all these inconveniences they have fallen upon an expedient which, as it agrees with their other policy, so is it very different from ours [European kingdoms], and will scarce gain belief among us who value gold so much, and lay it up so carefully. They eat and drink out of vessels of earth or glass, which make an agreeable appearance, though formed of brittle materials; while they make their chamber-pots and close-stools of gold and silver, and that not only in their public halls but in their private houses. Of the same metals they likewise make chains and fetters for their slaves, to some of which, as a badge of infamy, they hang an earring of gold, and make others wear a chain or a coronet of the same metal; and thus they take care by all possible means to render gold and silver of no esteem; and from hence it is that while other nations part with their gold and silver as unwillingly as if one tore out their bowels, those of Utopia would look on their giving in all they possess of those metals (when there were any use for them) but as the parting with a trifle, or as we would esteem the loss of a penny! They find pearls on their coasts, and diamonds and carbuncles on their rocks; they do not look after them, but, if they find them by chance, they polish them, and with them they adorn their children, who are delighted with them, and glory in them during their childhood; but when they grow to years, and see that none but children use such baubles, they of their own accord, without being bid by their parents, lay them aside, and would be as much ashamed to use them afterwards as children among us, when they come to years, are of their puppets and other toys.

What this utopian example presents is an alternative cultural setting, one where gold is associated with deplorable things. In this setting gold would not act as a safe haven. Naturally, More is simplifying reality. For example, since other nations outside utopia value gold, holding gold reserves would actually act as accumulating a mean of payment, for example for imports. Still, I think this is a thought-provoking example of how the value society puts on gold might ultimately just be a cultural phenomenon.

This is answered in many threads on Money SE. I'll quote just some.

## Why do people prefer to buy gold when stock market moves downward? Simon B answered Feb 23 2020.

Gold is considered a safe haven when everything else is going wrong. When the economy is doing well, gold has the big disadvantage that it pays neither interest nor dividends. You buy it, sit on it, and hope that it gradually goes up in price with inflation.

When the economy is failing, gold has obvious advantages. Shares can lose all their value if the company goes bust. The same goes for bonds issued by a company. As central banks intervene, interest rates go down, to the point where they are less than inflation. At that point, gold looks tempting.

If you are particularly pessimistic, then you might be worried that the central bank will introduce negative interest rates on savings. Alternatively, ill-considered attempts by the government to keep up public spending might cause hyperinflation. At this point, gold becomes a way of saving your wealth from economic collapse.

So people buy gold as a way of preserving their wealth, even if the price seems high.

I would add that gold has the advantage over other commodities that it is valuable in small quantities, standardized and easily portable. So you can buy it and hoard it at home. And if everything really does go wrong, you can take it with you when you abandon your home and become an economic migrant.

Bob Baerker answered Feb 23 2020.

Regarding gold, for the past three recessions:

• In 1990, it lost about 10% of its value

• In 2000, it did nothing

• In 2008 it dropped 30% from its peak price before recovering and ending up 4% for the year.

Gold is ‘iffy’ during recessions.

# Why is gold not a good investment? vic answered Nov 3 2015.

I think what the person meant to say is that Gold is not a one stop solution. There's nothing wrong with having Gold in an otherwise diversified portfolio but you need to be aware about the potential downsides:

• Gold doesn't pay any income in form of coupons or dividends. So even if the price doesn't move at all, in real terms you will have lost money (assuming inflation above 0)
• While it may be true that in the very long run the price of gold is stable (disputable), gold can have strong fluctuations in value. So if you find yourself in a position that you have to sell, you might to so at a big loss.

The problem with gold is that its value nowadays depends mainly on investor confidence, or the lack of it (actual demand for gold cannot explain the rise in value gold had after the crisis). If people are afraid the world and currencies with it will go to hell, the gold price will go up. Why? Because if currencies seize to exist, Gold will still be accepted. It can replace currencies.

What many people tend to forget: let's consider the extreme example and currencies really cease to exist and all hell breaks lose. What good are gold bars at the bank, or even at home, for that matter? You'll be better off with gold coins to use in barter and to pay off marauders. But that's not about investing anymore, that's survivalism.

For short periods, gold will provide a decent hedge, but no better than other financial instruments. We are now in an odd time, where the stock market is generally flat to where it was 10 years ago, and both cash or most commodities were a better choice. Look at sufficiently long periods of time, and gold fails.

In my history, I graduated college in 1984, and in the summer of 82 played in the commodities market. Gold peaked at \$850 or so. Now it's \$1200. 50% over 30 years is hardly a storehouse of value now, is it? Yet, I recall Aug 25, 1987 when the Dow peaked at 2750. No, I didn't call the top. But I did talk to a friend advising that I ignore the short term, at 25 with little invested, I only concerned myself with long term plans. The Dow crashed from there, but even today just over 18,000 the return has averaged 7.07% plus dividends. A lengthy tangent, but important to understand.

A gold fan will be able to produce his own observation, citing that some percent of one's holding in gold, adjusted to maintain a balanced allocation would create more positive returns than I claim. For a large enough portfolio that's otherwise well diversified, this may be true, just not something I choose to invest in. Last - if you wish to buy gold, avoid the hard metal. GLD trades as 1/10 oz of gold and has a tiny commission as it trades like a stock. The buy/sell on a 1oz gold piece will cost you 4-6%. That's no way to invest.