Gold isn't the safe haven asset you think it is

Telegraph

16-04-2025

Last week, a man made £100,000 in just a few days by investing in gold. Today, the aureate metal has set yet another record high price, trading at more than $3,300 (£2,488) for a single ounce.
Pop the words 'gold' and 'safe haven' into your favourite search engine and you'll be greeted with a wealth of articles confirming that indeed, yes, bullion beats all as the ultimate bolthole.
As with everything in investing, beware anyone who knows anything for certain.
The ructions in global trade caused by US President Donald Trump's universal tariffs have sent gold on a glittering run of late, with the commodity up 5pc since 'Liberation Day', and 26pc higher year to date.
Not influenced by a single factor, the rise in its price is owed to myriad concerns best lumped together under the word 'uncertainty'.
Here enters common knowledge: in uncertain times, gold will typically outperform. While true, we often overlook the qualifier in this phrase, finding it difficult to deal with precisely when it would serve us best.
The inconvenient truth is simple and worrying – there is no such thing as a safe haven asset.
There are assets that are typically inversely correlated, things that have historically gone up when other things go down, but past performance is no guarantee of future results.
Now more than ever, we have plenty of uncomfortable evidence shaking the foundations of what we think we know.
In 2022, in the wake of the infamous mini-Budget, one typical safe haven asset broke from tradition so aggressively that the Bank of England had to step in to reassure markets. As a result of the liability driven investment (LDI) crisis, nobody will look at UK gilts the same way again.
Now, the safest of safe havens has broken from tradition, and US Treasuries, the most certain of financial assets, are uncertain. Prices have fallen and yields have spiked – this is not what they should do in response to collapsing markets.
Treasury basis trades, off-the-run trades and swap spread trades have had the blame laid at their feet, with phenomenally leveraged hedge funds forced into unwinding these trades. But at the real heart of this, much like the LDI crisis, is a fundamental unease with a government, which in turn damages faith in traditional havens.
When the world fundamentally changes, it is perhaps unsurprising that historical truths change with them – I've written more on what this might mean in a recent Investor Newsletter, the archives of which can be accessed when you subscribe.
But even in history, these truths are more flexible than we might wish to admit.
We all know a bear market lasts for a few months, maybe more than a year, and then we're back on track. According to research from Goldman Sachs, that's been true since the post-war era. With one exception in 2000, we've not had a bear market that lasted more than 21 months – the average is just 13 months.
Run the clock back before 1945, and the average bear market exceeds the longest we've suffered since, coming in at 36 months. Spare a thought for those in the mid-19th century, who endured an 82-month mauling.
With the end of the post-war era, we might want to brush up on other precedents.
Sure, other bits and pieces of financial wizardry may have broken of late, but gold is tangible, it can't be manipulated by markets and must rise in times of uncertainty, right?
Taking the example of our well-timed investor, had he invested just five days earlier, rather than making around £100,000 in a week, he'd have lost that same amount in four days.
That's thanks to the unwinding of some financial wizardry, as large investors flooded the market with gold in order to meet margin calls held elsewhere, sinking the price by 5pc and commissioning a wealth of notes asking, 'What just happened?'.
There is also a lot of head-scratching over the amount of bullion being imported into New York at the moment.
While gold has since recovered these losses and has returned to its upward trajectory, this hiccup proves that even this safe haven can leak in a storm.
A 2023 outlook from the World Gold Council asserted, 'gold does well in recessions'. Read beyond the headline, and that tricky word 'typically' rears its head.
Delivering positive returns in five out of the last seven recessions is surely impressive, but had you flooded your capital into gold during each, it would have let you down almost a third of the time.
Even over the long term, gold isn't as safe as it's sold to be.
Let's say you'd bought gold at the height of worry during the 1980 recession – at less than $700/oz, you'd be laughing today. But that depends on how long you could hold your nerve.
It would take almost three decades for that gold investment to make a profit, staying under that peak through each successive recession, bear market and bout of global uncertainty until 2007 came along.
That's Black Monday, the first and second Gulf wars, the dotcom boom and bust, and the recession of the early 1990s, to name just a few events, not sparking enough love for gold to offer you anything but a loss.
Now and forever, the investor's best weapon against uncertainty is diversification. There is no silver bullet or golden egg – the most effective solution is to make sure those eggs aren't in one basket.
Gold is typically a hedge against uncertainty, but remember, this time can always be different.