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Now that gold has slipped into a bear market, a lot of investors are wondering how this setback could possibly happen to an asset that has long been touted as a haven in a risk-filled world.

Well, the real issue here is why haven-seeking investors all too often find themselves holding dangerous investments.

It's usually because people convince themselves that safety and profit can go hand in hand.

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Let's be blunt: Gold has had nothing to do with safety over most of the past decade. During its 650-per-cent rise since 1999, whatever virtues it held as a hedge against economic calamity or inflation were pushed aside by speculative fervour.

Twelve-year bull markets can do that, instilling the belief that what goes up will keep going up and reward investors with big returns – much like U.S. real estate or Canadian income trusts did years ago.

To be fair, the original arguments in favour of gold were largely based on its defensive characteristics.

According to its fans, gold would hold its value if inflation took hold as a result of the aggressive stimulus policies of central banks. And if the bottom dropped out of the global economy, gold would keep a roof over your head.

But this defensive play also came with tantalizing benefits. The sales pitch went like this: The Chinese are loading up and central banks are also buying as they diversify away from the U.S. dollar – a doomed currency, yes? – creating high demand amid low supply.

Add it up and the big gains are still to come! Or so argued the gold bugs. The metal not only appealed to our safety-first impulse, it also appealed to our desire to get rich, making it a bizarre dual-purpose investment.

As gold rose, investor interest surged. According to the World Gold Council, investment demand rose to more than 1,700 tonnes in 2011, the year gold hit its nominal record high of $1,900 (U.S.) an ounce. That marked a fourfold increase in demand since 2001.

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It helped that gold had become a quick-and-easy purchase. The SPDR Gold Trust, a gold-backed exchange-traded fund that launched in 2004, saw its units outstanding rise more than 300 per cent between 2006 and 2011.

Over the same period, the units traded rose from about 30 million a day to a high of 240 million.

You can understand why investors saw a need for safe investments. The bursting of the technology bubble in 2000 created distrust of the stock market, confirmed by the financial crisis of 2008 and the bear-market lows of 2009.

At the same time, experimental central bank policies in Europe and the United States raised uncertainty about the long-term consequences of ultra-low interest rates and quantitative easing. Government bonds, traditional havens, yielded next to nothing.

But gold has always had shortcomings as a haven. It pays no dividend, generates no profit and has little industrial use, making it impossible to value the metal in the same way as most other investments.

Worse, its stupendous gains had made it vulnerable to a sudden shift in sentiment – making it resemble some of the most horrendous asset bubbles in modern times.

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At least its decline of more than 20 per cent should bring some clarity to what gold really is.

At best, it's a volatile precious metal that can reward nimble speculators. But as a safe investment, gold has been all shine and no substance.

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