Gold as a Crisis Hedge?

Michael Panzner has a post over at Barry Ritholz’s blog with some graphs showing what has performed best and when. He writes that:

Given the spotlight that’s been shown on gold lately, some might naturally view it as the best investment to buy after a crisis strikes.

However, based on the following chart, some might argue that emerging equity markets are the true safe haven.

crisisreturns

I guess we’ll just have to see what happens next time…

I take issue with this because he chooses dates that are a the peak of the crisis. Why not choose 2007 when things began? The best thing to do is pull out some ratio charts. That can tell us what is really going on here.

dec4goldcrisis

The top line shows Gold and below we show Gold against Emerging Markets, the S&P 500, Commodities (the CCI and not the CRB that has messed up weightings) and Copper.

We can see that in all but one case, Gold began a substantial uptrend at the start of the crisis. For Gold/Commodities, the uptrend began in the middle of 2008.  These ratios fell as everything recovered during q2 and q3. However, now we see Gold regaining strength against all these markets. Meanwhile, Gold is at an all time high against all major currencies. It has no overhead resistance as the trend is hitting the point of recognition, where the market realizes its in a major bull market.  Emerging Markets and Commodities have recovered nicely but face the major resistance from the 2008 highs.

A trend in motion usually continues. This technical analysis clearly shows that Gold has been the best crisis hedge and will continue to be. Gold’s outperformance is hinting that the credit crisis could become a sovereign debt crisis, with hyper-inflationary implications.