“Gold” said famed investor Warren Buffett in 1998, “gets dug out of the ground in Africa or someplace, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Yet for all that, we remain in love with gold – especially in times of uncertainty. With the COVID-19 crisis, interest in gold has soared, driving its price to historic highs (eclipsing its past record set back in August 2011).
Even Buffett seems to have softened his longstanding antipathy, with his company Berkshire Hathaway acquiring a US$565 million stake in the world’s second-largest gold miner, Canada’s Barrick Gold Corporation.
Owning shares in a gold-mining company, though, is not the same thing as owning actual gold. Since gold shares are linked both to gold prices and to the broader share market, they tend to move with the market when it falls sharply. That deprives gold shares of a key feature of gold bullion – its safe haven property.
What is a safe haven?
A safe haven is an asset that holds its value in extreme, unexpected events.
It is different from a “safe asset” that provides a guaranteed return, such as government bonds. In buying such a bond you effectively lend money to the government in return for a promise it will repay that money (with interest) in the future.
Safe assets, in other words, are “fixed income” assets, and their prices are relatively stable.
The price of a safe haven asset, on the other hand, will fluctuate, rising in periods of heightened uncertainty, when other investments suffer extreme losses, but may also fall when the uncertainty reverts to more normal levels.
We can see this in the price of gold over the past two decades, both in the wake of the Global Financial Crisis beginning in 2008 and now with the COVID-19 crisis.
- ^ Warren Buffett in 1998 (quoteinvestigator.com)
- ^ back in August 2011 (money.cnn.com)
- ^ acquiring (www.wsj.com)
- ^ Barrick Gold Corporation (www.barrick.com)
- ^ market when it falls sharply (papers.ssrn.com)
- ^ CC BY-SA (creativecommons.org)
- ^ The S&P 500 nears its all-time high. Here's why stock markets are defying economic reality (theconversation.com)
- ^ From medicine to nanotechnology: how gold quietly shapes our world (theconversation.com)
- ^ World Gold Council (www.gold.org)
- ^ How the coronavirus pandemic has disrupted the global mining industry (theconversation.com)
- ^ in 2013 (www.cnbc.com)
Authors: Dirk Baur, Professor of Finance, University of Western Australia