Europe's fragile political condition is causing new jolts to its
financial plan to end the region's debt crisis.
The euro currency (NYSEArca: FXE) and global stock markets
(NYSEArca: VT) have been reeling over the past few days. And
interestingly, so-called "safe haven" trades like gold (NYSEArca:
IAU) have joined the decline. Why are precious metals falling and
where's the bottom? Can gold be rightly called a "safe-haven?"
Bullish underpinnings
Falling stock prices and currencies should be, according to theory,
the ideal setup for bullish trades in gold. If there's any time
that gold should be shining, it's when other major asset classes
are falling.
Add to these unsettling market conditions, one more bullish
factor that favors gold: The Indian government just repealed an
excise tax on sales of all gold jewelry. India is the number one
gold consumer market and gold is the country's second biggest
imported item after crude oil (NYSEArca: USO).
How has gold responded to these favorable conditions? Instead of
rising, gold's reaction to these bullish events has been negative.
Even boring long-term U.S. Treasuries (NYSEArca: TLT) have
outperformed gold over the past 3-months by a whopping
11%! Why isn't gold soaring?
Revisiting the safety of metals
Since gold has been sold to as a "safe haven" investment, we must
determine what that means.
A safe haven is defined as an investment that is "expected to
maintain its value or to increase in value during market turmoil."
Safe haven investments are sought after by investors to protect
their capital and to avoid the shock of unexpected events.
As market conditions change - and they always do - the crowd's
perception of what is "safe" versus what is "risky" changes too.
These perceptions are molded by previous experiences and do not
necessarily hold true in the future. In other words, investments
that were christened as "safe havens" during one period aren't
always that way during other periods.
The conventional wisdom that gold will always increase in value
when stocks, the euro (NYSEArca: FXE) or other investments fall has
been perpetrated by famous gold permabulls everywhere from
Singapore to Oconomowoc. And instead of questioning the validity of
these good sounding theories, the investing public has blindly
accepted them as gospel.
The zero income flaw
Because gold produces zero cash flow, it presents a major conundrum
for retirees or anyone whose main investment goal is to generate
more income.
While owning physical gold is psychologically comforting there
are no guarantees that it will perfectly hedge against future
increases in inflation or a currency meltdown.
In fact, gold's biggest shortcoming is the fact that it
generates no earnings, no dividends, and no income. This makes the
risk dynamics of gold compared to stocks and bonds strikingly
different.
And while a lack of income might not seem like something
important to a speculator, it is to everyone else. (The ETF Profit
Strategy newsletter's May Gold Income trade converted this dead
asset into a cash cow which vacuumed in $1,200. That's something
not even gold coins - in all their glory - can do.)
Safe haven Doubts
Referring to the previously mentioned definition of "safe haven,"
neither gold nor silver fit that current description.
The ETF Profit Strategy newsletter keenly observed just one
recent example of this among many: "The 4/4/12 market selloff took
the Nasdaq-100 and S&P 500 lower by 1.46% and 1.02%
respectively. Instead of behaving in a defensive manner, instead of
being a haven of safety, instead of zagging when stocks are zigging
- the SPDR Gold Shares (NYSEArca: GLD) had the audacity to fall
1.68% while the iShares Silver Trust (NYSEArca: SLV) moxied up a
4.19% loss."
The fact that precious metals (NYSEArca: GLTR) have experienced
deeper declines than stocks on down days is problematic to the
"safe haven" theory.
The
ETF
Profit Strategy newsletter
reports key trading levels for both gold and silver. And if GLD or
SLV slice right through the thresholds we've outlined without any
sort of resistance, both metals could be in for bigger losses
ahead. On the other hand, if they bounce and hold, it might signal
a good buying opportunity.