Is Gold a Good Investment During a Stock Market Crash?

Is gold really a better investment than the stock market - In short, no - and here's why.

Gold has long been seen as a haven during economic distress and stock market crashes. It is seen as one of the few asset classes that have historically held its value during market volatility.

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During periods of economic uncertainty, such as during a stock market crash, investors often turn to gold as an investment that can provide some protection against losses in other asset classes.

Contrary to popular belief, gold is not a good long-term investment compared to stocks. However, it can provide a good alternative investment asset during the early stages of a stock market crash.

Why is gold widely perceived as the best haven for your capital as the stock market goes through a bear market correction or a full market crash?

Is Gold a Good Investment During a Stock Market Crash?
Is Gold a Good Investment During a Stock Market Crash?

Is Gold a Safe Haven During a Stock Market Crash?

There are several reasons why gold can act as a haven during a stock market crash. The first is that the price of gold tends to remain relatively stable and does not fluctuate wildly like other investments such as stocks or bonds. Gold also preserves its purchasing power over time, maintaining its value even when compared to inflation-prone currencies such as the dollar or euro.

Additionally, gold prices tend to increase when investors sell off stocks and other assets to protect their portfolios from losses, thus providing investors with an extra layer of security during volatile times.

Gold’s status as a haven should not be taken for granted, though; its performance during times of economic crisis is not always certain. Many factors influence the price of gold, including global demand and supply levels, interest rates set by central banks, geopolitical tensions, production costs, and more. Therefore, investing in gold may not always be the safest option during a stock market crash and should be considered carefully with all available variables taken into account.

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Why gold is a bad investment during a stock market crash

For several reasons, gold can be a bad investment during a stock market crash. First, gold prices are highly sensitive to market trends, so they can rise and fall quickly depending on how investors react to news and events. This means that even though gold tends to hold its value during times of volatility, it can still decline as investors rush to sell their holdings to protect their portfolios.

In addition, gold is not always guaranteed to provide investors with positive returns; the price may decline if global demand for gold decreases or production costs rise too high. Finally, investing in gold does not offer much liquidity because it is difficult to convert into cash quickly; therefore, investors may find themselves stuck with a large sum of money tied up in the metal at the worst possible time in the market cycle.

The facts about gold

For gold to be a good hedge, it would need to move in the opposite direction (have a negative correlation) to the broad market index, in this case, the S&P500. To protect your 401K, you would want to see evidence of gold being the right bet.

Looking back 15 years, we can see that this is not the case for Gold (GLD) compared to the market.

Gold vs the S&P500, 15 Year Monthly Chart Comparison
Gold vs. the S&P500, 15-Year Monthly Chart Comparison

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Gold Performance 2005 to 2007

Gold outperformed the S&P500 with 52% gains compared to 25% for the S&P500.

Gold Performance 2007 to 2009

During the financial crisis, gold provided a haven for seven months until it lost all its gains. This meant those moving their capital to gold at the beginning of the crash would have made no profits. But if you had invested in gold in 2008, you would have incurred severe losses. This does not sound like a haven to me.

Gold Performance 2009 to 2020

The S&P 500 goes on a staggering bull run, making 481% to January 2020

Gold made 138% from 2009 to 2012, moving in correlation with the market, then suffered a serious crash, wiping out 42% of its value. The crash and stagnation last eight years.

Gold is still 13% lower than its previous all-time high.

So, during an 11-year stock market bull run, gold lost 13% of its value.

Gold Performance 2020 to 2024

Over the last four years, gold has increased in value by 50%, which is pretty good, but it does not match the performance of 63% in the S&P 500.

My Observations

  1. Gold might provide a temporary solution as a haven during the early part of a stock market correction.
  2. During the Credit Crisis, Gold should have been a perfect store of value because, as it seemed, the Fiat Currency system was failing. Gold would have been a great replacement currency along with silver. But that did not work out.
  3. Gold is only a safe haven if people think it is.
  4. Since the 2009 stock market bottom, gold has increased by 65% and the SP500 by 232%.

Is gold a better long-term investment than the stock market?

The stock market offers investors higher returns than gold over the long term. However, many factors should be taken into consideration when making an investment decision. Gold is often seen as a safe haven during times of market volatility and economic distress, as its price tends to remain relatively stable, and it preserves its purchasing power over time. This makes gold an attractive option for investors looking to protect their portfolios from losses during periods of uncertainty.

However, it is important to note that gold prices can still decline if global demand decreases or production costs rise too high. Additionally, investing in gold does not guarantee positive returns, and it can be difficult to convert into cash quickly.

Ultimately, deciding whether to invest in stocks or gold depends on the individual investor’s risk appetite and financial goals. For those comfortable taking on more risk in exchange for potentially higher returns, investing in the stock market may provide a better long-term investment opportunity than gold.

On the other hand, those who prefer more conservative investments with lower volatility may find that investing in gold is a better option. It is important to do your own research and consult with a financial advisor before making any investment decisions.

Would I use gold as a safe haven?

Personally, no. Not based on this evidence. However, in the short term, it may provide relief until people stop believing.

What is a good alternative? Holding cash and dollar-cost averaging into the market again as we near the bottom.

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