Is gold a stupid investment in times of turmoil?

A coming economic implosion as a result of ill-conceived trade wars, rising debt obligations, and the threat of yet another war in the Middle East is the perfect recipe for a gold bull market. But the justification for owning gold in times of conflict is, for lack of a better word, stupid.

Let’s just say, for a moment, that the world really did get flipped upside down. Cyber-attacks cripple everything. Electrical grids go down, gas pumps stop working, nuclear power plant vulnerabilities are exposed, grocery store shelves are decimated, and medicine and clean water become scarce. The world goes to hell, but because gold is a “safe haven” asset, you’ve got nothing to fear – as long as the world continues to view it that way.

Analyst Brett Arends made some very interesting observations, including the following:

Gold was demonetized in 1973, when the United States government formally abandoned the gold standard. So any arguments for gold as a “safe haven” that depend on data from before 1973 are based on a flawed premise.

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.

The further the gold standard recedes into history, the less power it has for those still investing.

Gold has “worked” less and less as crisis insurance as time has gone on. In the stock market crash of 1987, it rose all of 5%. In the financial crisis of 1998, it rose 2% — after first falling. And in the financial crisis of 2008, it failed completely as any kind of safe haven, falling as much as 30% as desperate investors dumped everything, including bullion, to raise cash.

Gold’s long early history as “currency,” dating back thousands of years, is certainly interesting, but it’s irrelevant financially. It predates the rise of modern nation states, laws, banks, and communications. The conditions that drove merchants to buy and sell with gold back then no longer exist.

The main appeal of a “safe haven” is that it doesn’t depend on anyone else. But the main drivers of the gold price seem to be retail demand, both through exchange-traded funds and in emerging markets. And that, too, means it is more likely to be volatile than “safe.” Of course, this isn’t to say you can’t do well with gold in normal times.

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