A challenge to debate: How safe is gold?

The price of gold varies inversely with certainty. The more uncertain the environment, the higher the price of gold because people will scramble for gold as a hedge against uncertainty. However, certain events for the past two weeks have baffled many of us. It opens the door for debate and intellectual discourse on how true the safe-haven status of gold really is? Let's do that now.

Last week, when Switzerland pegged its CHR (Swiss Franc) at 1.20 to the Euro, its currency was immediately devalued by about 8%. Since then, the Swiss Franc which in the past was often viewed as the safest haven currency, has lost its luster.

But despite having one less competitor in the safe haven basket, the price of gold did not rocket up as expected. Instead it went down about $50 when the CHF news hit the streets.

Again, over the last weekend, rumors circulated of a probable Greek default and the price of gold again closed down more than $40.The main culprit being the huge rebound of the US$ over the weekend. It spiked from 73 to 77 on the US dollar index. The reason is, if the whole of SEA or Southern Europe collapses, so does the Euro, and people will again look for an alternative safe haven currency and it will be the US$.

Competing with T-bills, dollar

But when economies collapse, people will also be scrambling for gold and hence that should push its price up. At the same time, institutional and hedge funds will be scrambling to buy US Treasuries as other safe haven assets to diversify their baskets, and this would also push up the US$. So, what happens to the price of gold, when at the same time, its competitor (the US$) also gains confidence?

A good example is during the last financial crisis in 2008, the price of gold despite being a safe haven went down from more than $1,000 in March to about $700 in October. Whereas, the US dollar index jumped from a low of 70.70 in March 2008 to 87.80 in October 2008. At the same time the Dow Jones (DJIA) was at 12,500 in March 2008, before it went down to 8,300 in October 2008.

So what does it mean? It shows that people are abandoning gold during the darkest days in the financial markets. But shouldn't they be accumulating gold when financial markets collapse?

In view of this, I am uncertain whether the arguments still hold, i.e. gold demand equals fear demand and also that gold provides the best hedging against currencies and dislocations of economies?

Can someone please provide an insight into this?