Despite its recent pullback, gold's bull run, which began more than a decade ago, has rewarded those who owned it through the financial crisis. For investors willing to put up with intermittent declines -- some of them substantial -- gold has lived up to its billing as a "safe haven" asset. Will it continue to live up to that reputation? Perhaps not, as recent evidence suggests that it has been relegated to the ranks of its grubby commodity peers. If you own gold on the expectation that it is an effective hedge for the rest of your portfolio, now is the time to re-evaluate that premise.

Safe haven or risk asset?
Over the past eight months, as I monitored the financial markets in the backdrop of the eurozone crisis, I've been repeatedly puzzled by gold's behavior. As Mr. Market was once again subject to schizophrenic "risk on/risk off" moods, gold was consistently putting up losses on "risk off" days -- contrary to expectations. In fishing around for explanations, I must tip my hat to the Financial Times' James Mckintosh for providing one possible interpretation of this phenomenon.

Let's compare gold's performance to that of the Dow Jones-UBS Commodity Index, which, as the name suggests, is a broad-based commodity price index. The first chart below begins with the fourth quarter of 2008, during which the financial crisis hit the world full-on (Lehman Brothers failed in October). Both indexes have been rebased to 100 at the beginning of the period.


Source: Dow Jones Indexes.

As we compare the two graphs during this period, we can see no clear relationship between gold and the broader group of commodities. As fear of financial and economic collapse increased, and as authorities across major developed economies responded with huge dollops of fiscal and monetary stimulus, investors began to treat gold as a currency no government can debase, rather than as a precious metal with limited industrial applications. It benefited accordingly, appreciating strongly; meanwhile, there is no corresponding trend for commodities, which look stuck within a range.

Putting things in focus
Now, let's focus on the end of that period. Here is the same graph for the year to date. I've again rebased the two indexes to start at 100 at the beginning of the period.


Source: Dow Jones Indexes.

Over this timeframe, the two graphs are a lot more tightly aligned. The chart suggests that gold price movements are now consistent with those of a broader set of commodities. By extension, the same factors are driving returns, including expectations for global -- and particularly Chinese -- GDP growth. Meanwhile, the notion of gold as a safe haven appears to have lost its appeal with investors.

Gold is no longer an effective hedge
This is consistent with my own observations that gold is no longer functioning as an effective hedge in the face of market upheaval. For example, the metal achieved its all-time high in early September last year -- well before the European crisis hit its (most recent) nadir in the fourth quarter. Since then, I have seen gold retreat with other risk assets on "risk off" days, giving the lie to its safe-haven status.

If gold were still trading as an alternative, "hard" currency, we should expect prices to be at or near fresh highs right now, given the level of fear related to the eurozone crisis. Indeed, if we look at other perceived safe-haven assets -- whether they be the Swiss Franc, German Bunds, Japanese government bonds, U.K. gilts, or U.S. Treasuries -- all are at or near historic levels. The SPDR Gold Shares ETF (NYS: GLD) , meanwhile, has declined by nearly a fifth since its Sept. 6 intraday high.

Not a currency, just a metal (albeit a precious one)
Last month and at the end of 2011, it was reported that the gold chart was in the throes of a "death cross" (which certainly sounds unpleasant), with the 20-day moving average moving below the 200-day average. I don't normally put much stock in technical analysis, but many people who trade gold do (there are no fundamentals to go on, after all). I'm told a death cross is a bad omen. Perhaps it is utter nonsense, but it can't help sentiment. Either way, investors who own gold should be aware that it is now trading like a metal, rather than as a safe-haven currency. If exposure to the commodities sector is what you're after, you'll want to look at this free Motley Fool report: "The Only Energy Stock You'll Ever Need."

At the time this article was published Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Did you drink the kool-aid too??????????? If you have 1oz of gray matter, you know that gold is NOT "just a metal." The price fluctuations of ALL the metals as well as the constant ups and downs of the markets, are being manipulated by the elite.You know that and many others do too.
This is unbiased journalism??? Oh please! How do you sleep at night or look at yourself in the mirror?!!

June 15 2012 at 11:04 PM Report abuse rate up rate down Reply

I concur with Twodoc here. Gold has been used for thousands of years from the times of the Pharohs as a repository and status symbol of wealth. If it was truly of limited value than why did American fiat currency rely for so long on it as substantive value backing for the greenback? Have we become so habitually transfixed on the relative merits of one currency versus another that we have lost sight of what basic intrinsic value a currency holds? It's simply nowadays, a green or orange or yellow piece of paper. It's a cocktail party point of discussion: "how many pieces of green paper do you make at work?"
All commodities, not just gold, have intrinsic value that derives from percieved want or need. As long as currency is desired by a group, it too will have value. But when the underwriting governents that issue them, wantonly show disrespect with their own spending habits born of their intoxication with being the creator of that currency, the value of that currency will be percieved as of less worth. If history is to be believed and relied on, that is when precious commodities' values will reassert themselves massively and the shine of gold will glimmer as it has these past ten years.

June 15 2012 at 10:32 AM Report abuse rate up rate down Reply

This writer bases his conclusions on eight months worth of data. Gold has maintained a steady purshasing power over literally thousands of years......all of recorded human history. Two thousand years ago, one could purchase a quality saddle for one ounce of gold. Two hundred years ago, one could purchase a quality saddle for around $20, the value of one ounce of gold. Today, one can purchase a quality saddle for around $1500, about the value of one ounce of gold. Gold is the ultimate store of financial value....and the fact that most central banks across the world are vigorously buying gold should tell you something. Don't listen to the nonsense in this article! Fiat currency-based economies, which numer all the major economies of the world now, have been trying to convince everyone for fifty years that gold is just a metal.......HA! They wish! They all hate gold because gold forces discipline on governments, which they despise.

June 12 2012 at 1:29 PM Report abuse rate up rate down Reply