Sentiment and fundamentals may disagree, but in the end, fundamentals always win.
We see this phenomenon at the top of every bull market cycle when investors reach a stage of euphoria, blind to the bear looming around the corner. We also see this during the start of every bull market, when investors, too afraid to jump into the markets, are left behind.
Just because you believe something is a safe haven doesn’t necessarily make it so.
The Bitcoin bubble toward the end of 2017 taught many investors about sentiment-driven safe havens. If you can remember, financial pundits were speculating that investors’ flight-to-safety in Bitcoin rivaled that of the yellow metal. And then we saw what happened to Bitcoin. It wasn’t pretty.
In the U.S., investors seeking safety have been running away from gold and towards the U.S. dollar. It’s ironic because the manipulability of the dollar is one major factor that had driven investors toward the safety of gold and silver.
Short-sighted and misguided? Absolutely, if their perception of “intrinsic value” happens to be the price. What makes the dollar “safe” for many of these investors has little to do with fundamentals and more to do with price-driven sentiment.
Fundamental value, not price, is what makes a safe haven a “safe haven.”
It’s important to remember that like the dollar, gold is a form of “money.” Although it can be considered an asset, one that can provide capital growth and appreciation like a stock, growth is not its most significant characteristic.
Gold is a form of money. But not the kind of money that you would use in day-to-day transactions. It may not make the best medium of exchange. But what it can do that the dollar cannot is to preserve one’s purchasing power.
Gold is immune to the inflationary forces that can too easily seize and degrade the value of paper currency; the dollar. Gold cannot be manipulated or created out of thin air. Gold’s is backed by its own physical properties which people have valued for millennia, unlike the dollar which used to be backed by gold and silver and is now backed by “faith” in the US government and the Fed. More importantly, however, and unlike the dollar, gold is scarce. And one foundational characteristic of money is that it should have scarcity.
In the US, gold is crashing; but elsewhere gold is soaring.
As the Turkish Lira continues its downward spiral, gold also continues to serve as Turkey’s primary safe haven asset.
Interestingly, Turkey is home to the ancient kingdom of Lydia, one of the first civilizations to coin gold back in the 7th century B.C. As its currency and economy tumble, particularly in light of the Trump-Erdogan standoff, gold is performing its role as Turkey’s “everything hedge.”
And consider the Eurozone a few months ago back in May when European elections in Italy, Spain, and Germany caused a great deal of uncertainty. As gold’s dollar value fell, its price in Euros had risen.
Gold’s intrinsic value may be universal but its pricing in US dollars is not. More confidence in the dollar does not lessen gold’s intrinsic value, even if it lessens gold’s price in dollars. So if you are still wondering whether gold is still a good investment, just take a look around. Gold is still (and will continue to be) a reliable safe haven across the globe.
And when it comes to preserving your purchasing power against the inflationary forces that affect the dollar, gold and silver are the only financial assets that are immune to fiat currency degradations.