Volatility Tarnishes Gold's Safe Haven

Myra Saefong MarketWatch September 9, 2011

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Sept. 8, 2011, 6:16 p.m. EDT

By Myra P. Saefong, MarketWatch

SAN FRANCISCO (MarketWatch) "” Many investors believe gold is the "ultimate safe haven," but it certainly hasn't been acting much like one lately.

"If something is volatile, it is not safe," said Edmond Bugos, director of mining finance at Strategic Metals Research & Capital.

And gold has been quite volatile in recent weeks. On Aug. 24, futures prices /quotes/zigman/661658 GC1Z -0.15% dropped 5.6% "” their worst single-session decline since March 2008. Other big moves included a gain of 2.6% on Sept. 2 and a fall of 3% on Wednesday.

Paul Vigna talks about the volatility of gold with Tatyana Shumsky on Markets Hub.

So gold has hardly been the "place of refuge or security" that defines a safe haven. Maybe "defensive play" is a more fitting role for the precious metal.

"I have never bought gold simply as a place to hide, though I do own it as part of a strategy that will hopefully preserve my capital through this turmoil," said Bugos. "When I actually commit money to something, I am thinking about returns, as well as risk, and I want to be where the risk-reward ratio is optimum. That, in my opinion, is the best kind of defensive investment strategy."

And believe it or not, gold has been a risky investment recently for short-term traders. In the longer term, it's still considered as the least risky asset for investors. Read about gold's investing risk.

"Safe haven refers to "?long term' in terms of gold's role in the financial world," said Terry Hanlon, president of Dillon Gage Metals. "Nothing can stop short-term profit taking or emotional buying and selling" in a good or bad economy.

These just happen to be "unprecedented times in a faltering economy, which are creating record-breaking prices in gold," he said. "It's a market that has never before been experienced."

And against that backdrop, gold offers a haven, a shelter, for investors.

"It is still less volatile than the market as measured by the S&P /quotes/zigman/3870025 SPX -1.06% ," said Robert Barone, a principal and investment adviser representative of Ancora West Advisors in Reno, Nev. And over the past 10 years, "it has never gone down as much as it has gone up."

/quotes/zigman/661658 GC1Z 1,854.80, -2.70, -0.15% /quotes/zigman/3870025 SPX 1,185.90, -12.72, -1.06% December gold vs. S&P 500 Index

Gold is not a stand-alone investment, it's part of a portfolio allocation and in a portfolio, it is a "volatility reducer," he said.

Besides, the volatility the market has seen in the precious metal's prices is hardly typical.

In 2010, gold was the second-least volatile out of about 16 or 18 major commodities, with livestock being the No. 1 least, and far less volatile than either the S&P 500 or even crude oil, said Ross Norman, chief executive officer at London-based bullion brokers Sharps Pixley. "Don't judge gold by the recent moves. This is very untypical."

The current gold volatility will, however, "unsettle some investors who typically buy gold as a wealth preserver and not as a punt to make money," he said.

Just keep in mind, that "broadly, gold has done its job" over the past 10 years. "It's seen a solid rally "¦ but now it's reflecting concerns about the financial markets," he said. "There is an element in current gold prices which is reflective of the economic times we live in. This is the premium that is volatile in the gold prices."

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Myra P. Saefong is our assistant global markets editor based in Tokyo. She has been with MarketWatch since 1998 and holds a master's degree in English... Expand

Myra P. Saefong is our assistant global markets editor based in Tokyo. She has been with MarketWatch since 1998 and holds a master's degree in English literature. Collapse

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