Is Gold Still a Safe Haven for Investors? - A Canadian Perspective

With gold finishing the week by falling under $800 US an ounce, many investors are scratching their heads, wondering how the safe haven metal could be falling during such a severe and unprecedented global economic crisis. The banking systems in countries around the world are crumbling, requiring governments to intervene in order to keep them from collapsing. Counter party risk is now a primary concern for anyone lending or investing money in this environment. Most people would have expected gold to thrive in such an atmosphere since holding physical gold has no counter party risk, no risk of defaulting and no risk of fraudulent accounting practices or corrupt management. Gold does not pay any dividends or interest. There is no growth potential in gold. It simply sits there being gold. And as the years go by, an ounce of gold, will always be an ounce of gold. It does not pay investors anything or grow into something bigger… because it does not have to. Gold is money. It has been a store of value for the people of the world for thousands of years. As empires have risen and fallen and currencies created and destroyed, gold has stood the test of time and protected wealth throughout history.

Canadian stock markets have been hit hard this month, along with every other market in the world. The sharp fall in the price of oil and other commodities is taking its toll on the commodity-heavy TSX. Canada’s biggest customer, the United States, is maxed out, unable to afford to consume our natural resources.

The Canadian dollar had been strengthening over the recent years against the US dollar, but lately took a nose dive as this economic crisis unfolded. The two currencies were near par throughout the first half of 2008, but began to slip in mid July, before tumbling in October as the markets crashed. One US dollar currently buys $1.18 Canadian dollars, and our Canadian dollar buys less than 85 American cents. This should come as some comfort to those who have lost money in American stock markets, since they are able to add almost 20% to their stock values on the currency exchange back to Canadian dollars. On the other hand, when looking at declines in the Canadian stock market from a US dollar perspective, the losses are even greater.

For some strange reason, Canadians always look at the American dollar price of gold. Canadian financial television shows and newspapers rarely quote the price of gold in Canadian dollars. As a result, Canadian investors perceive that the price of gold is falling, creating the impression that gold failed to act as a safe haven during this economic crisis. This could not be further from the truth. Gold made a new all time high in Canadian dollars this month, at a time when every single asset class, in all world markets, was getting crushed. Why did the media fail to inform the Canadian people that gold broke to a new all time high, especially at a time when peoples’ wealth was being obliterated? Stock markets have retreated to levels not seen in a long time, erasing years of profits and leaving investors with nothing to show for their long term approach. Gold on the other hand has been a great investment for the past decade and has now asserted itself as one of the best performing assets this millennium, whether anyone wants to admit it or not.

A decade ago, if investors had bought gold at under $300 US, they would still be sitting on an over 150% gain, despite the recent pullback below $800 US. Many long term investors would be thrilled with these kind returns after what has happened this month to the stock markets. But even though the price of gold has been steadily rising in the last decade, very few financial advisers recommended the metal as a core asset for investment portfolios. One explanation is that when people go to the bank or a coin store and buy physical gold, investment advisers do not get to line their pockets from selling overvalued stocks.

So is gold still a safe haven for Canadian investors? Gold started the year by breaking out above the old 1980 high of $850 US, making its way above $900 in January. It made a new all time high in March, during the Bear Sterns Crisis, soaring above $1000 an ounce. At the time, the Canadian and US dollars were virtually at par. Gold fell from its March high, bounced back up off the old $850 high, but broke below that important support level in August, bottoming in September at under $750. This was followed by a spectacular rally, including an $80 move in four hours of trading, bringing gold above $900 US briefly, before crashing to where we are now, below $800 again.

But Canadian investors need to keep in mind that the value of the Canadian dollar started to weaken in July, before tumbling in October. When gold made its move above $900 US earlier this month, gold actually made a new all time high in Canadian dollars, briefly breaking above $1100. Even today with gold below $800 US, gold is still well above $900 Canadian dollars and still higher year to date. Any Canadian who had the foresight to buy physical gold this year is probably pretty happy with their investment, especially in comparison to all of those in the stock markets. Gold did exactly what it was supposed to do. It protected the wealth and purchasing power of Canadians. It preserved savings when the value of the Canadian dollar was falling. It held relatively steady in a time when almost all assets, both good and bad, were being sold off in the rush for liquidity. And for some people around the world, such as those in Iceland, owning physical gold meant the difference between preserving wealth, and virtual bankruptcy.

In recent months, the physical precious metal markets have been experiencing shortages, particularly the various one ounce coins. Even the headquarters of the Scotia Bank in downtown Toronto was sold out of all one ounce gold bullion bars at one point. People all around the world have been in a panic to get their hands on the physical metal, and suppliers simply cannot keep up with demand by individual investors for the small coins. The Canadian Gold Maple Leaf, American Gold Eagle, South African Krugerrand, and especially some of the older $20 Liberties or Saint Gaudens are commanding incredible premiums. Therefore, if investors bought these coins when they were readily available at low premiums, not only to do they get the appreciated value of the gold, but also an increased premium that adds a second layer of profits. Buying gold coins at anywhere close to spot price on EBay these days is almost impossible, whereas in the past, buying though EBay generally had some of the lowest prices.

The good news for investors is that the ship has not set sail yet if they still want to climb on board the golden lifeboat. It is my opinion that the price of gold remains grossly undervalued and is set to explode upwards when the US dollar bubble finally pops. Government fiat currency is being created out of thin air by central banks all around the world. There is no end in site to the money printing, especially as baby bombers retire and demand their retirement benefits, which government has already spent. The result of all this government intervention in the free market will have to be paid through inflation, making gold far more appealing than paper currency in the long run.

Worried investors have already sold their assets as the markets declined, but most have simply put their wealth into cash or cash equivalents. And even though many stocks and asset classes in the markets were overvalued, selling real assets for paper money is like jumping out of the frying pan and into the fire. Stocks, bonds and cash should all be sold off in favour of physical gold, since gold is expected to gain tremendous value verses paper currencies and the stock market for many years to come. Investors still in the stock markets, who have lost a fortune and refuse to accept fire-sale prices for their valuable assets, may find that the undervalued gold mining stocks provide the best chance at a quick recovery, even though they remain under considerable stress.

With many Canadians wondering whether or not their money, their investments, and their retirement accounts are safe... unfortunately, the truth is that none of them are safe. There is still a lot of downside risk in many stock markets, especially the American markets. The government has already spent the money that was paid into the Canada Pension Plan and saved nothing to fund future medical expenses for retiring baby boomers. The government will be forced to create the money out of thin air to fund future obligations. And with central bankers around the world running the printing presses at full speed in an attempt to slow down the economic crisis, this makes holding onto paper currency very dangerous. The United States is on the verge of a financial collapse that will send shock waves around the world. The US dollar, the world’s reserve currency, is at risk of totally collapsing. And since all other currencies are backed by nothing but US dollars and other fiat currencies held in the reserves of Central Banks, all the currencies of the world are in danger of losing value they never really had in the first place. Owning physical gold that you can hold in your hand may end up being the only thing separating the people of the world between prosperity and poverty. I am confident that any Canadian who sells their house now, near the peak of the bubble, and buys gold with their profits, will be in much better off financially over the next few years. At some point, there will be a global rush into gold and I am hoping that Canadians get on the lifeboat before the economic ship that we are all on sinks to the bottom of the ocean.