Gold vs. Economic Crisis: A Safe Haven? (Part 1)

Introduction

Recently, there have been frequent reports about gold prices hitting all-time highs. As readers of my blog know, gold is one of the assets I have been particularly interested in. Gold is commonly perceived by investors as a safe-haven asset that performs well during crises. But is that really the case? To find out, let’s examine how gold prices behaved during some of the major economic crises in the past. Initially, I was going to process the data myself, but I came across an excellent website called Macrotrends, which helped me save a lot of time and effort. All the data and charts I reference come from Macrotrends; I simply organized and analyzed them.

In the chart below, the red line represents gold prices, and the blue line represents the Dow Jones Industrial Average (DJIA). While I personally prefer the S&P 500, I am good with the DJIA as well. The data provided is on a monthly basis, so it doesn't show detailed short-term fluctuations, but that’s fine because what we’re really interested in is the overall movement of gold prices compared to the stock market during economic crises.

2020 COVID-19 Pandemic Crisis

Source: www.macrotrends.net

Let’s start with the most recent crisis - 2020 COVID-19 pandemic crisis. Using November 2019 as the reference point, the DJIA fell by 22% by March 2020. During the same period, gold prices rose by 10%. As you may remember, after hitting bottom in March, stock markets surged as the U.S. government implemented huge stimulus policies, injecting money into the economy. Interestingly, gold also soared. By August 2020, when the DJIA had fully recovered, gold had increased by 35%.

2008 Global Financial Crisis

While the stock market crash during the 2020 COVID-19 pandemic was severe, it pales in comparison to the 2008 financial crisis. Let’s take a look.

Source: www.macrotrends.net

From September 2007 to February 2009, the DJIA fell by 49%. Meanwhile, gold prices rose by 36% until March 2008, demonstrating its strength as a safe-haven asset during the initial phase of the crisis. Though gold prices dipped after that, erasing much of the gains, they rebounded by February 2009, achieving a 34% return. If you had allocated a significant portion of your portfolio to gold, it would have partially offset the steep decline in stock prices.

2001 Dot-com Bubble Burst

Source: www.macrotrends.net

Using January 2001 as a reference point, the DJIA fell by 30% by September 2002. The decline was especially severe for tech stocks, and since the DJIA has a lower tech weighting, it fared relatively better. For comparison, the tech-heavy Nasdaq fell from its peak of 5,048.62 on March 10, 2000, to a bottom of 1,139.90 on October 4, 2002, a staggering 77% decline. While the stock market was crashing, gold prices rose by 20% by September 2002 and continued to increase, reaching a 35% gain by February 2003. Once again, gold proved its value as a safe-haven asset during this crisis.

1997-98 Asian Financial Crisis

Source: www.macrotrends.net

Looking at the DJIA during this period, it seems like the Asian financial crisis occurred in August 1998, but that’s not the case. Thailand requested an IMF bailout on August 20, 1997, and South Korea requested one on November 21, 1997. While Asia was engulfed in a currency crisis, the U.S. stock market, using July 1997 as a reference point, fell by 9% in October but quickly recovered, posting a 10% gain by April 1998. However, in August 1998, the DJIA dropped by 8% in just one month, with Russia declaring a debt moratorium, and the collapse of the giant hedge fund Long-Term Capital Management (LTCM) exacerbating the situation. Although I won’t go into detail, the Asian financial crisis, the Russian moratorium, and the LTCM collapse are closely interconnected.

So how did gold prices fare during this series of crises? Unfortunately, gold didn’t live up to its reputation this time, falling by 12% between July 1998 and the peak of the crisis. Could the increase in gold supply due to the gold collection movement in South Korea, aimed at overcoming the financial crisis, have contributed to this? Thailand and Malaysia also held gold collection campaigns, though not as successfully as South Korea. However, the DJIA’s decline of 16% from peak to trough (monthly data) was relatively mild compared to the other crises we’ve examined.

1982 Latin American Debt Crisis

Source: www.macrotrends.net

In August 1982, Mexico declared a moratorium. The Latin American debt crisis began in Mexico and continued throughout the 1980s, affecting Brazil, Argentina, Chile, Peru, Uruguay, Ecuador, and others. Since Mexico was the starting point of the Latin American economic crisis, I chose it as the reference point for analysis.

Even though a severe economic crisis was unfolding in the  neighboring country, the U.S. stock market experienced a significant boom. Using July 1982 as the starting point, the  DJIA had risen by a remarkable 38% by February 1983. However, during the same period, gold prices increased even more, with a 44% rise in just seven months. Unfortunately, gold later declined, giving back about 20 percentage points of those gains. Nevertheless, with gold rising between 25% and 44% during a period of economic turmoil in Latin America, it still proved its value as a safe-haven asset.

I will conclude Part 1 here and continue exploring how gold prices moved during the 1970s inflation crisis in Part 2. After that, I will present two more charts to provide further insights into gold.

Thanks for reading. Wish you grow rich slowly and surely!

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