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Is Gold Still a Safe Haven Asset?

29 December 2015

Watch Time 4:08

"You look around the world and you’re likely to find someplace where gold is probably being used as a safe haven"

Is Gold Still a Safe Haven Asset?

TOM BUTCHER: Why is gold a safe haven?

JOE FOSTER: Gold has a number of characteristics that make it a great safe haven. First of all, it's indestructible. You can bury a gold coin in your backyard, and your grandchildren can dig it up 50 years from now, wash it off, and still find a nice, shiny gold coin. It's an established store of value throughout all cultures throughout human history; everybody recognizes it as a store of value. It's very liquid. You can convert gold to paper currency anywhere in the world, anytime you want. Most importantly, it's a financial asset outside of the established financial system. It needs no government backing. There's no counterparty risk with gold. You can't print gold; it's limited in supply. It is a unique financial asset that's used as a safe haven.

BUTCHER: Why are some people starting to believe it isn't a safe haven?

FOSTER: I think part of that has to do with modern media and technology. We've got news streaming to us 24/7 and there's always a crisis going on somewhere in the world that's being magnified through the media. I think that gets people thinking, why isn't gold reacting to all these horrible things that are happening everywhere? When something happens around the world that has you concerned, ask yourself, does it impact the global financial system? Does it impact the U.S. economy? Does it have any impact on the average American? If the answer is "no," then it's probably not a driver for gold in the long term. To really move gold in the long term, something needs to be wrong or there needs to be some sort of issue with the U.S. financial system. The U.S. dollar is the world's reserve currency and therefore people need to see problems with the U.S. economy. If you're not seeing that, there's no long-term driver in the gold market.

BUTCHER: But it is a safe haven elsewhere, apart from the U.S.

FOSTER: Yes. Anytime you look around the world you will likely find someplace where gold is being used as a safe haven. Look at Brazil, for example. Brazil has been through a commodities crash and a terrible scandal at oil company, Petrobras. Moreover, the Brazilians have lost faith in their political leaders. If you look at gold in Brazilian real terms, it's at all-time highs. If you look at the GDM, the NYSE Arca Gold Miners Index, in Brazilian real terms, it's nearly at a two-year high. If you're a Brazilian holding gold in your portfolio, you're pretty glad you own it because it's performing very well. When I think of Brazil, it reminds me of the tech bust in the U.S. in 2000. We had a crash in tech stocks and we had the Enron scandal and other accounting scandals. People lost confidence in the financial system and the dollar embarked on a bear market, which kicked off the gold bull market. There are cycles at work. We’ve seen that in the U.S. We're seeing it now in Brazil. I expect in the future that as the cycles turn, gold will become a safe haven in other parts of the world as well.

BUTCHER: Thank you very much.