Is gold going to be an effective hedge in the next global financial crisis?

Posted on 02 July 2014 with 1 comment from readers

With global stock markets marking fresh all-time highs yesterday it might be considered churlish to consider what will happen when they turn down. However, if past business cycles are any guide to reality this cannot be far off.

Indeed, some might argue that the recent surge in gold prices is an indication that investors are taking money out of the stock market casino and looking for safe havens in anticipation of what historically they know to be inevitable.

Hedge or not?

The question then arises: is gold going to be an effective hedge in the next global financial crisis?

The immediate past precedent of the last GFC is not that helpful. Gold plunged a third in value alongside other assets in the big sell-off but rebounded faster and ahead of all other asset classes.

Expected returns – This term is an absolute no brainer but it still has a very important role to play in trading. The expected return on your investments plays a very important rule in the financial field. This is the number that is used in various calculations when you go to this site.

Was that a good hedge or not? Not if you were a day trader. But if you took a longer view yes it was.

However, gold prices fell by 32 per cent last year. It was not like that in 2008 when gold prices peaked along with everything else in the summer before the GFC. This time around gold has already had its correction.

Will this make a difference? Well, gold and silver have already outperformed US stocks this year on the rebound from last year’s sell-off. This could be a trend that continues in another GFC. In past major market crashes gold has been a safe haven asset and an effective hedge against falling asset prices for investors.

The alternative is to rely on bonds and US dollars as a hedge to falling markets. If history is any guide this will work well in the early phases of a market drop.

The problem here is that phase two of this GFC could include bonds and currency. There has been so much money printing over the past five to six years that this could be when it comes back to haunt markets.

Only true hedge

In that case your only really effective hedge is going to be gold and silver. Imagine what that will do to prices as this realization dawns on the rest of the investment world.

Think of the next GFC as an extension of the first and a new stage of the same phenomenon. It won’t be an exact repeat but rather a progression with a bond and currency crisis thrown into the mix.

We are talking about a crisis of the value of money and a global currency reset around the only money that cannot be printed and that is precious metals. They will be the ultimate hedge and that’s why they belong in all investment portfolios at the current time.