Gold (CME: GCZ4) may be more of a risk asset than safe haven

Many industry experts view gold (CME: GCZ4) as a safe-haven asset that is a hedge against inflation and uncorrelated to stock and bond performance.

But a lot of evidence points otherwise, especially recently. Given trends in modern capital markets, there is a strong case against purchasing gold now, or at any other time.

Let’s review the argument behind the above.

Gold has moved mostly in sync with stocks over the past eight years. 

When stocks have slumped, gold has often followed suit. That means gold hasn’t always served as a safe haven against sliding stocks.

Also during the last eight years, there have been plenty of times, like the present, when inflation climbed, but gold slid. That shows gold isn’t always a hedge against inflation.

For much of the past 300 years,  gold was a refuge for volatility in geopolitics and financial markets as well as rising inflation. But that’s no longer the case on a consistent basis. Gold is acting like just another risk asset akin to stocks, high-yield bonds, etc.

Short-term trading requires a deft touch

To make money trading gold in the short term, you must make good calls on when to buy (i.e. when gold is near a bottom) and when to sell (i.e. when gold is near a top).

Succeeding at that is no mean feat. Usually market participants just wish they know where those great entry points are.

It’s a bit easier long-term, as gold’s historical trend is higher. It has risen about 316% over the past 25 years. So investors make money by holding it for a long period.

However, the S&P 500 index (NYSE: SPY), which also has an upward long-term history, soared about 941% over the last 25 years. And one can argue that stocks in S&P 500 index are no more risky than gold.

Investors might feel good owning gold when it does rise in a period when stocks and bonds are falling. But that doesn’t mean much if you don’t sell it at a profit.

So if investors really want safety, buying Treasury bonds and not just gold probably serves your purpose. Investors can hold Treasury bonds until maturity and receive regular interest payments and all of the principal back.

That’s assuming the US government doesn’t default on its debt, of course. This is a separate discussion where gold would indeed be the only asset to shine.

Today investors indeed can make a compelling case to avoid the precious metal in their portfolios and yet be risk averse. All that glitters isn’t necessarily gold. So much for modern times in financial markets.