What’s A Safe Haven

by Dave

So rather than asking what’s money and what’s not, to understand what Dent believes, we have to think the same way he does.  He looks at what happens in the past, and from that, he extrapolates the future.  At least some of the time anyway.  [I don’t agree with him that gold is an inflation hedge, for instance, although I do agree it tends to rally with the overall commodity index]

Anyhow.  We can ask the question, “what acted as a safe haven during the 2008 market crash?”  The answer is, it depends on the timeframe and from what point you take your observation.

The two charts below are “index” calculations; I set the price of each item to be 100 at the start of 2008.  Then, I display them on the chart with the last day being (roughly) the SPX low for 2008 – October 20.  On that day, USD is up 10%, gold is down 8%, and silver is off a big 37%.  The move down for gold in 2008 involved a huge amount of deleveraging; there was a massive liquidation of paper gold at COMEX, and this certainly drove price lower.  In a financial crisis, leveraged paper gets liquidated, and any item whose price is tied to the paper drops.  I think this is quite likely to happen in any future financial crisis.  Paper will get thrown right out the window, and that will take down the related prices.  Likewise, all assets will be sold in order to meet margin calls.  The only thing immune to this effect is currency in which the money was borrowed: demand for currency during a time of deleveraging will rise.

So after the deleveraging was over, at the 2009 SPX low, we see USD +17%, gold at +10%, and even poor silver had come back, down only -14%.  SPX was off -50%.  Ouch.  Crude was off -55%.

Interestingly the low point for gold (down about -19%) was about two weeks before the Fed announced the initial QE program.  Low was Nov 13 @ 705, and QE was announced Nov 25.

Is gold a safe haven?  During 2008, it really wasn’t.  We can blame paper, or manipulation, or whatever, but my sense is, if there is another panic like 2008, gold will probably drop in price, especially if the buck rallies 10% the way it did last time.

If we assume that the Fed will execute some reflationary policy in response to a market collapse, and assuming that doesn’t cause the buck to sink precipitously, then at that point, its probably a reasonable time to buy gold.  But given history, I’d expect a 20% drawdown in the price of gold during a market crash, just based on what happened in 2008.  That doesn’t suggest gold 450; seems more like gold $950 or $1000.  Silver, on the other hand, could drop down to $10.  But, good luck buying physical silver for $10; if it did drop that low, I’d back up the truck on PSLV because I do not think I would be able to buy eagles at that price – I suspect they’d all be bought out.

Premiums at Shanghai would probably also scream higher.

Poor oil would probably drop into the 20s.  Again.

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