Wednesday , 18 October 2017


Careful! Gold’s Performance in Times of Crisis Often Not As Expected

We are in the midst of turbulent times, and it seems inevitable that things can only get worse. Most investors are of the opinion that gold is one of a very few areas of safety… however, when we look at historical charts, it is obvious that gold doesn’t always behave in the way we would expect. [Let me explain.]

The comments above & below are edited ([ ]) and abridged (…) excerpts from the original article written by Carl Swenlin (decisionpoint.com)

Performance of S&P 500 and Gold During Gulf War

As we can see [in the chart below], stocks behaved in a predictable way — crashing when Iraq invaded Kuwait in August, then rallying within hours of the initial bombing in January, when it became obvious that the worst fears were unfounded.

(Click on graphs for a clearer picture)

spx 1991

gold 1991

Gold, on the other hand, [as can be seen in the chart above,] rallied when Kuwait was invaded, but then it began to meander in a wide range, ending with a final rally just before the Coalition attack began. Once the outcome of the war was known (almost immediately), gold resumed normal trading. One might have assumed that gold would rally continuously during the period of uncertainty, but one would have been wrong.

Performance of S&P 500 and Gold During Global Financial Crisis of 2007

[As can be seen in the chart below,] stocks declined for over a year until making a bear market low in early 2009.

(Click on graphs for a clearer picture)

spx 2009

gold 2009

Gold, on the other hand, [as can be seen in the chart above,] rose over 300 dollars from 2007 to early 2008. Then it began a wide-ranging decline into late 2008, during which it lost almost all its initial gains. One might have thought that gold would have maintained a steady climb during the entire period of the crisis, but, again, one would have been wrong.

After the low in 2008, gold began a steady rally that ultimately took the price to over 1900, so from that point of view, gold was a big winner in the face of the financial crisis. However, the 30% correction in 2008 had to have been a period of major confusion and high anxiety for those who thought their investment in gold was supposed to protect them from the fallout of the financial crisis.

Conclusion

We can devise logical scenarios as to what the price of gold should or should not do, but gold doesn’t always follow the plan. To paraphrase an old Jewish saying: “Man plans. Gold laughs.”…

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3 comments

  1. In any crisis, by definition things are not normal, so to expect that everything fiscal is going to be normal is insane. Those that are responsible for the value of their own portfolio’s and especially those that are responsible for the values of the portfolios of others, need to have a plan in place to protect both themselves and the portfolios they manage. It may sound strange but if your are unprotected, that leaves the portfolios you administer unprotected, since you are unable to oversee them during what probably will turn out to be a very important period.

    That said, those that own accounts that are managed by only one person also need to ask themselves what could happen to their portfolios if their portfolio Manager became unable to manage them during a crisis?

    If you enter a hospital for surgery they now ask you if you have a final directive and if so, they ask for a copy of it just in case, because if you don’t have a plan in place you are leaving very important decisions up to someone that is completely unknown to you!

    Likewise, all portfolio Managers should always have at least one backup person identified to step in should the portfolio Manager become unable to make important decisions and I’d add that the time period that passes before this replacement happens should be short enough so that even in a crisis, the portfolio is as well protected as possible by a Manager who is monitoring the crisis. This concept is no different from a vessel at sea during a big storm, when the Captain is “at the helm,” the vessel has the best chance to weather the storm.

    I wish everyone smooth sailing!

  2. In any crisis, by definition things are not normal, so to expect that everything fiscal is going to be normal is insane. Those that are responsible for the value of their own portfolio’s and especially those that are responsible for the values of the portfolios of others, need to have a plan in place to protect both themselves and the portfolios they manage. It may sound strange but if your are unprotected, that leaves the portfolios you administer unprotected, since you are unable to oversee them during what probably will turn out to be a very important period.

    That said, those that own accounts that are managed by only one person also need to ask themselves what could happen to their portfolios if their portfolio Manager became unable to manage them during a crisis?

    If you enter a hospital for surgery they now ask you if you have a final directive and if so, they ask for a copy of it just in case, because if you don’t have a plan in place you are leaving very important decisions up to someone that is completely unknown to you!

    Likewise, all portfolio Managers should always have at least one backup person identified to step in should the portfolio Manager become unable to make important decisions and I’d add that the time period that passes before this replacement happens should be short enough so that even in a crisis, the portfolio is as well protected as possible by a Manager who is monitoring the crisis. This concept is no different from a vessel at sea during a big storm, when the Captain is “at the helm,” the vessel has the best chance to weather the storm.

    I wish everyone smooth sailing!