In investing, the definition of a 'safe haven' is an asset that is
expected to retain its value or even increase its value in times of market
stress and uncertainty
Traditionally, gold is perceived as a safe haven because in such
circumstances, it often moves up in value when equities and certain
currencies (known as 'risk assets') decline sharply.
History shows the price of gold increased significantly during the global
financial crisis, topping US$1,900 per ounce in September 2011. After a short
move lower, the Greek debt crisis and fears over its withdrawal from the
euro-zone propelled the price of gold higher, though not quite touching the
highs of a year prior.
Last week, gold was again a beneficiary as rattled investors deserted
international stock markets in the wake of Britain's unexpected vote to quit
the European Union.
Institutional investors were not the only ones among the action with
internet giant Google reporting that the number of searches for the phrase
"buy gold" spiked by 500pc once it became apparent the 'leave' side
was likely to win.
Reflecting the mood, calls to the Depository
division here at The Perth Mint from private individuals anxious to invest
funds in precious metal coins and bars were dramatically higher than average.
Uncertainty, the enemy of the markets, was compounded by the resignation
of UK Prime Minister David Cameron immediately after the vote was confirmed.
Fears that Greece and possibly other members of the European Union will now
look to follow Britain's lead, and that the fall-out from all this is
damaging the world economy has some experts predicting gold's rally is not yet over.
Belief in gold in times of crisis is based on the idea that it helps
protect the value of money. In an example of how this works, the World Gold Council says that a U.S. family home could be
purchased for $25,000 in 1971 - a sum no longer enough for a mortgage deposit
at today's prices! By contrast, 700 ounces of gold (the equivalent of
US$25,000 in the 1970s) can buy a US$1 million property today.
For this reason, it advocates a diversified investment portfolio
containing some gold as an insurance against global gloom-and-doom scenarios."Our
analysis shows that gold can be used in portfolios to protect global
purchasing power, reduce portfolio volatility and minimise losses during
periods of market shock," it says, suggesting a modest 5 to 6 per
cent allocation is optimal for investors with a well-balanced 60/40
portfolio.
With additional risk factors including the underlying
strength of China's economy and the possibility of a Trump presidency, the
allure of gold will continues to strengthen in the minds of investors already
fearful over the consequences of Brexit.
