Gold lost its safe haven status during the housing/financial crisis, falling along with stocks as hedge funds and other investors were forced to sell the metal to raise cash to cover mortgage losses stemming from the Lehman Brothers collapse.
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But during the latest market selloff, gold has resumed its role as a safe haven/diversification play.
While the S&P 500 has plunged more than 17 percent from its 2011 high, gold has continued to set records nearly every day.
The bull market in bullion, which began in late 2008, turned 1,008 days old on Thursday, making it the fourth longest rally for gold since 1975, according to Bespoke Investment Group.
The SPDR Gold Trust (GLD) fell 9 percent from the start of 2008 until the September bankruptcy filing of Lehman Brothers. The S&P 500 lost 15 percent over that same period. The 10-Year Treasury yield got as low as 2.2 percent, but still offered some solace and real return at the time given the lack of inflation.
“One of the problems with diversification is that during times of turmoil, asset classes tend to become highly correlated, defeating the purpose of the diversification in the first place,” wrote Justin Walters, a Bespoke analyst, in a report to clients Thursday.
“This was especially true during the financial crisis in late 2008 when hedge funds and other asset managers were hit with massive redemptions. This caused even a safe haven like gold to fall along with everything else.”
But this time it is different, gold bulls said. With the yield on the 10-year Treasury falling below 2 percent Thursday to its lowest level since WWII and the 3-Month T-Bill yield turning negative, bonds offer little refuge.
“Gold has a new class of investor,” said Steve Grasso, director of institutional sales trading at Stuart Frankel & Co. “The people buying gold this time around are buying it to hold it long term for their kids, for their retirement and not just a market timing trade. Coming out of the housing implosion and Eurozone stress, there is a real perception, right or wrong, that gold is the only investment that's not built on sand.”
And this second financial crisis is more global in nature, with fears of rising costs to bail out faltering Euro members playing an equal, if not bigger, role than U.S. troubles in the fear. A global currency crisis plays right into hands of the only currency that has stood the test of time: gold.
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