In times of fear and uncertainty, investors have historically looked to gold as a safe haven. Gold is perceived to be a storm-weathering asset, capable of withstanding both economic crisis and inflation. Accordingly, investors have flocked to gold as a place to park cash since the Great Recession, perceiving it to be a better long-term store of value than many other assets. Some of these investors hope that gold will appreciate in the event of a debt-crisis relapse at home or abroad. Other "gold bugs" believe that gold will help protect them against an inflationary spiral triggered by the massive amounts of quantitative easing undertaken by central banks across the world. These concurrent fears helped push the price of gold up over 200 percent from the beginning of 2007 to its high in late 2011.
A week ago, Monday, the S&P 500 dropped 2.3 percent to 1,552 amid concerns about a slowdown in the global economy. China released its GDP growth for the first quarter. At 7.7 percent, this marked the first time in 20 years that the world's second largest economy has had four consecutive periods of growth less than 8 percent. Here at home, the Federal Reserve's Empire State Manufacturing Survey dropped 8 percent from February's reading, signaling a slowdown in manufacturing. In addition, sharp weakness in commodity prices (including the ones that do have practical applications) left many investors worried that a global economic slowdown is at hand. And finally, Monday was also marred by two explosions at the finish line of the Boston Marathon. The economic data, both global and domestic, along with increased fear over terrorist threats to the U.S., led to the biggest one day drop in the S&P 500 in five months.
With fears of a slowdown in global economic growth and increased concern about the safety of U.S. citizens, one would think gold would be a safe bet to ward off the volatility in the markets. But gold also fell a week ago, Monday, plummeting from $1,482.75 per ounce to close at $1,348.21 -- a 10 percent drop in one day! The drop in gold is puzzling considering gold's status as a safe-haven asset. Some pundits attribute the drop in gold to the fact Cyprus may have to sell its gold reserves as part of an austerity deal. But Monday was just a continuation of a long slide in the price of gold over the past several months from its most recent peak of $1,790.15 per ounce on October 4, 2012. The 23 percent drop from that level comes as the Fed continues QE Infinity and as several other central banks around the world continue their respective monetary easing programs as well. Based on this data, it would appear that investors' fear of out-of-control inflation has subsided. Are the gold bugs capitulating following years of warnings about the downside risks to central bank easing?
With volatility in financial markets running high, and safe haven investments losing their status as such, the research process becomes more important than ever. High-quality companies with rock-solid balance sheets remain most attractive in a turbulent environment. Seasoned management teams and steady cash flows are more attractive to us than the uncertain payoff from a shiny metal that has little practical use.