Does gold still shine when markets fall?
Peter McGahan
Monday 17th November
THERE’S an old line I once heard from a retired trawlerman and, oddly enough, from a nervous investor in the same week: “When the sky turns black, you don’t debate the charts, you head for the lighthouse.” In a market storm, when headlines scream and spreadsheets freeze, some things are meant to just work. Gold, for many, is/was that lighthouse.
But does it really shine when everything else goes dark?
The logic behind gold’s “safe haven” status is old. In times of fear, we look for something that won’t let us down.
Cash? It feels safe until inflation erodes it. Bonds? Sound, unless the issuer wobbles. Property? Solid, except when you urgently need to sell. Gold doesn’t yield, doesn’t grow, doesn’t spin. It just sits. Which, in chaos, is sometimes precisely what people want.
This is nothing new. The Greeks buried it with their dead. Roman generals stitched into their cloaks. Not because gold would compound in value, but because it would endure.
2008. 2020. Stress test passed?
Let’s take two modern storms. In 2008, financial giants crumbled. Some equities fell over 50 per cent peak to trough. Government bonds panicked. Yet gold rose 6.5 per cent that year and doubled by 2011.
Fast forward to March 2020. Covid strikes. Markets plunge 30 per cent in three weeks. Even gold slips as investors scramble for cash. But within months, it’s not just back, it’s up 20 per cent as investors looked for a safe haven.
Dirk Baur and Brian Lucey, two respected professors, conducted detailed research into gold’s crisis behaviour. They made an important distinction:
A hedge is something which doesn’t move with equities, good or bad.
A safe haven is something which holds firm, or even rises, specifically during market stress.
In their 2010 study (Financial Review), gold proved to be a decent hedge and a more consistent safe haven in developed markets like the US, UK and Germany. But that wasn’t universal. In emerging markets like China, India, Brazil, the pattern was less reliable.
And not all crashes are equal. In 2020, gold was initially sold off, not because investors lost faith, but because cash was urgently needed. Even lifeboats get thrown overboard when the ship is on fire.
So, can you rely on it as a hedge?
Well, sometimes yes, sometimes no. Gold often behaves well in crises, but not always. And even when it does, how much it helps, depends on where you live and what currency you spend in.
A UK investor holding gold priced in dollars will also experience currency movements. If sterling weakens, gold may appear to do even better. If it strengthens, you might feel short-changed.
Warren Buffett famously dislikes gold. “It just sits there,” he said. And he’s right. Gold doesn’t produce income, pay dividends, or invent the next iPhone. It’s a lump of metal.
But sometimes, having something that “just sits there” is exactly the point.
How much gold is enough?
A 2015 study by O’Connor, Lucey and Batten examined the optimal allocations to gold in diversified portfolios. Their answer? Somewhere between 5-10 per cent.
Not enough to replace growth assets like equities or productive real estate. But enough to soften the blow when everything else goes falls. Think more like lifeboat, not motorboat.
But what if everyone rushes at once? When panic hits and gold demand surges, the price can spike. If you rush to buy then, you're not locking in safety - you’re often paying a premium for late insurance. Buying expensive insurance after the event isn’t a good strategy.
As with all forms of insurance: buy it before the crisis, not during.
How to use gold wisely? Don’t overload. Use it for protection. Not excitement. If gold is your “growth” engine, your boat may never leave the harbour. Rebalance regularly. If gold surges ahead, trim it back to target. If it falls from favour, consider topping up. But remember, it’s not an investment which does anything.
Keep it in context. Gold is part of the team, not the captain. Equities, bonds, cash and gold all play different roles.
So, does gold still shine in a storm?
Often, yes. Sometimes brilliantly. But not always, not everywhere. Gold is not a promise, it’s a preparation.
If used wisely, without getting romantically linked to it, gold still has a role. Not as a miracle magic bean, but as a measure of calm when the lights flicker.
And in markets, as in life, that may be enough.
I will write a guide to ‘investing’ into Gold. If you’d like a complimentary copy, please call 01872 222422 or email info@wwfp.net and we’ll send you a copy when it’s published.
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser firm, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
