Why is gold a safe haven?
The simple answer is that it has worked in the past. Based on past experience in a crisis, people believe in the safe haven feature of gold and it works because they believe in it.
Gold has been used since ancient times as a store of value. Helping it achieve this status is its aesthetic appeal, malleability (with a relatively low melting point making it easy to produce coins or jewelry), virtual indestructibility (almost all the gold that has ever been found or mined is still around), and, most importantly, a rarity. Though hundreds of thousands have dug and panned for it over history, the amount of gold mined has never been enough to devalue it.
‘Nobody understands gold prices’
Gold may also be a safe haven because it is simple and well-known, the first thing that comes to mind when investors are faced with extreme uncertainty.
This apparent simplicity, paradoxically, does not mean easy-to-understand gold prices.
Some factors influencing its price are tangible, such as physical supply and demand.
But many factors influencing gold’s price are less tangible, such as changing perceptions, preferences and market sentiment.
As then US Federal Reserve chairman Ben Bernanke said [removed] : “"Nobody understands gold prices, and I do not pretend to understand it either.”
“Gold” said famed investor [removed] , “gets dug out of the ground in Africa or someplace, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Yet for all that, we remain in love with gold – especially in times of uncertainty. With the COVID-19 crisis, interest in gold has soared, driving its price to historic highs (eclipsing its past record set [removed] ).
Even Buffett seems to have softened his longstanding antipathy, with his company Berkshire Hathaway [removed] a US$565 million stake in the world’s second-largest gold miner, Canada’s [removed] .
Owning shares in a gold-mining company, though, is not the same thing as owning actual gold. Since gold shares are linked both to gold prices and to the broader share market, they tend to move with the [removed] . That deprives gold shares of a key feature of gold bullion – its safe haven property.