Gold: Safe haven or just another volatile commodity? – by Terry Cain (Globe and Mail – February 23, 2016)

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On Feb. 11, the Dow Jones industrial average plunged by nearly 255 points, the S&P 500 dropped 1.2 per cent, and most of the Canadian equity market fell just as much in the latest in a series of sharp selloffs for global equities.

However one asset – and one equity sector – flew in the opposite direction. The price of gold soared by more than $50 (U.S.) an ounce, and gold-mining stocks enjoyed gains of 5 per cent or more.

Gold has long been considered a safe haven when there is turmoil in the rest of the financial world. Whether it is war, currency crises, stock market crashes or runaway inflation, gold has historically been an asset that holds its value when other assets are crumbling. But is it still an effective way to limit downside risk for average investors?

Recent history gives some support to gold’s reputation, even ignoring the big recent one-day move for gold. Looking at periods in the past 10 years when the S&P 500 fell by at least 10 per cent, gold has increased in value over each of those periods. However those gains were often modest – 3 per cent or less.

Bullion certainly has its fans in the Canadian investment world.

“Gold continues to have investment value as a diversification and safe-haven tool,” says Douglas Waterson, a portfolio manager at Toronto-based Faircourt Asset Management Inc. He notes that in times of stress, asset classes such as stocks and bonds tend to become more correlated.

But gold usually exhibits different behaviour. This lower correlation makes gold a useful part of the portfolio as a stabilizer, and perhaps a source of liquidity in difficult times.

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