When share markets fall, investors usually turn to fixed interest in cash to park their money. But even fixed interest can be risky and cash can be devalued by inflation and currency movements. If foreign banks become concerned about holding US dollars, they usually go for gold. Gold is a safe haven asset but gold stocks aren't the only way to invest in gold.
You can also get exposure to gold prices through Exchange Traded Funds (ETF) through the SPDR Gold Trust which is traded just like shares. The trust issues securities which are backed by physical gold. If you look at the chart for gold long-term versus the chart for the sharemarket, you can see that they do not move together. Hence gold is used as a safe haven because it doesn't move in the same way as the sharemarket and so it is used for diversification and to decrease risk in a portfolio.
In summary, gold is used in place of currency in times of risk: As a hedge against inflation
As a means for diversification and
To decrease risk in a portfolio.
Gold really starts to shine when there is lots of fear in the market. However, be careful because studies have shown that generally gold is not an effective means for profit after a large negative shock if held for more than 15 days after the shock. But it can benefit in the short-term. A rosy outlook for gold We will most likely see the price of gold go up in 2009 with the medium- to long-term outlook for the US currency looking weak.
Investors are likely to choose to invest in gold instead of a weak US dollar and that should support prices and see them move further upwards. Some people have been so scared of the financial system that they are holding actual physical gold instead of trusting it to the financial markets. Current demand for gold coins has gone through the roof and as such is expected to benefit the gold miners. Gold stocks Gold stocks can be widely divided into the large cap stocks and the smaller junior miners. The three largest gold stocks on the Australian sharemarket are in order:
Newcrest Mining
Lihir Gold and
Sino Gold.
Lihir Gold would be my gold pick due to its pure leverage which means it can take full advantage of a rise in gold prices.
Newcrest Mining also is a quality gold company but with capital expenditure of $2 billion over the next four years. Lihir Gold is probably going to do better in the current environment.
Happy investing!
Why is Gold a Safe Haven?