One of the first question people ask about gold investing is often: Is gold a safe investment? If history is any guidance then yes, gold is a very safe investment. People have used physical gold for almost 5000 years now to store and preserve their wealth. In many cases they have also increased their wealth just by storing it in physical gold.
You may have heard the expression that gold is considered to be a safe haven? But what does this all mean? How can an investment be safe? I mean theoretically everything should be able to go to zero right? To become worthless.
The real reason why gold is considered a safe investment is because it is a hard asset instead of a financial asset. When you buy a stock, that is not more then a piece of paper that you own. It has no intrinsic value like a hard asset. With intrinsic I mean that you can feel and touch it. Much like a house will be a hard asset. You can feel the bricks and mortar and see the roof. You can see the value. Same with physical gold.
Because I mean if you really think about a stock or any other financial assets are not more then just a piece of paper claiming that you own something. That paper could disappear in a stock market crash for example. With gold you have the safety of holding the hard asset yourself. The thing with value is in your hands and not stored on a computer somewhere where you have to hope that it is actually there and it says your name on it.
When you want to answer the question if gold is a safe investment I think we should look at how gold is performing during a market crash or other economic uncertainties. That is when most people loose all of their money and they wish that they had placed their hard earned cash in something safer then a stock market paper. It’s during these times when you can see if an asset is considered safe or not.
Golds performance during stock market crashes
One thing you often hear about gold is that it is a safe asset to be in during stock market crashes and other economic uncertainties. During a stock market crash panic drives the market way down. For example in the stock market crash of 2008 people that were invested in the stock market lost around half of their money almost over night.
Lets have a look at some of the stock market crashes in history and see how gold did. Does the statement that gold is a safe haven under economic uncertainties hold? First lets have a look at how gold performed during the stock market crash of 1929 which was the beginning of the Great Depression.
From 1924 to 1929 the stock market had seen tremendous gains and the major reason why was because the so called investment trusts which is kind of the same as a mutual fund today. And because of the laws of economics that nothing will keep going up for every sure enough everything came crashing down in 1929. The Dow Jones Industrial Average went from 385 points in October of 1929 and bottomed out at 41 in 1932. So if you were invested in the stock market in 1929 you lost almost 90% of your money! No thank you.
Because gold at the time had a fixed price simply because the dollar was backed up by gold it is hard to use the physical gold price. What people usually do to look at the performance of gold during the great depression is to look at a gold stock that was called Homestake Mining. This is used as a representation of all gold stocks. The stock went from $80 in October of 1929 and soared in value to $495 per share in December 1935 (end of great depression). That is a 519% gain!
Take a look at the chart below where the red line represents the Dow Jones Industrial, which represents the stock market. And then the golden line which is the Homestake Mining stock which will represent the gold price. Simple question: Where would you want to have your money in a market crash?
We have only looked at one stock market crash and the evidence is already very convincing that yes the statement is true. Gold is a very safe place to be if you want to preserve, and increase, your wealth during a market crash. You will see the same pattern in almost every market crash. As soon as people fear a stock market crash they sell their stocks to buy physical gold which drives the price through the roof.
Lets have a look at another market crash that is a little bit more recent and see if we can find the same patterns. Between January 11th 1973 and December 6th 1974 the United States experienced a great stock market crash. The Dow Jones Industrial average, which is used to represent the stock market average, lost 45% of its value in just two short years. This made it the seventh-worst stock market crash in the history of the index.
Lets see if the statement still holds that gold will skyrocket during an environment like this. In 1973 gold was publicly traded as a commodity. 1971 Richard Nixon took away the peg between the dollar and gold, and gold could be traded freely. During the great depression we looked at a gold mining stock but now we can look at the actual price of one ounce of physical gold.
At January 11th 1973 the price of gold was $65 for one ounce. By the time the crash and recession was over in December 6th 1974 gold had risen to $180! Gold had almost tippled in value during two short years when the stock market had lost almost half of it’s value.
Once again gold has proven that during economic uncertainties and market crashes people will dump all their paper assets and run towards physical hard assets like gold, driving the price much higher. I have just taken two examples here but if you do some own research you will see that the safest place to be during economic uncertainties is physical gold. You will not only protect your wealth. In many cases you will increase it dramatically.
These two examples is not something that I have just fabricated to prove a point. If you look at all the market crashes and other economic uncertainties all the way back to Ancient Greece you will see similar results. Gold has been tested many times throughout history in the form of wars, crashes, earthquakes and everything else dramatic that you can think of where you have a fear of losing your money. Every single time gold has kept it’s value as a promise of being a safe investment.
Me personally and a lot of other people think that another stock market crash is imminent. You can feel it in the air that there is a lot of uncertainties around the world and sooner or later everything is going to come crashing down just like it has done so many times through history. This time will not be an exception.
Do you want to take advantage of this? Would you like to do the same type of trade as people did in 1929? When instead of staying in the stock market and loose almost 90% of their money they saw the economic storm coming and placed themselves in physical gold to see a 519% gain of your money instead?
I believe that we are faced with the same opportunity today and I for sure will take advantage of it to make myself richer. There is more reasons for why you should invest in gold then just because it is a safe haven. Click the link below to find out what my top 3 reasons are of why you should invest in gold or please leave a comment.