gold investment, silver investment

Precious metals investment terms A to Z

Safe Haven

A safe-haven asset is an asset that is uncorrelated (weak safe-haven) or negatively correlated (strong safe haven) with another asset or portfolio in times of market stress or turmoil. It should not be confused with a hedge, which is an asset that is uncorrelated (weak hedge) or negatively correlated (strong hedge) with another asset or portfolio on average. Hence, a safe-haven asset protects investors during crises, unlike a hedge, which protects them in normal times, but not necessarily during turmoil. Thus, a safe-haven asset is expected to retain its value or even increase its value in times of market turbulence, when most asset prices decline.

Gold as Safe Haven

Gold is commonly believed to be a safe haven in times of financial or political uncertainty, since it is not at risk of becoming worthless, unlike fiat currencies or other assets bearing credit risk. Indeed, according to Baur and Lucey (2010), gold is a hedge and a safe haven for stocks, but not for bonds. The authors also found that gold works as a safe haven only for a limited time, around 15 trading days. This suggests that investors buy gold on days of extreme negative returns and sell it when market participants regain confidence, and the volatility is lower. Baur and McDermott (2009), using data from 1979 to 2009, showed that gold is both a safe-haven asset and a hedge for major European and U.S. equity markets, but not for Australia, Canada, Japan or major emerging markets such as the BRIC countries (investors suffering losses in emerging stock markets turn to developed markets rather than to gold). Thanks to its safe-haven status, gold is used as a portfolio diversifier.

Although most economists agree that gold is a safe haven, Baur and Glover (2012) remind investors that the safe-haven features may change over time as gold gets more popular as an investment to protect against equity market turmoil. This is because investors who hold significant amounts of gold in their portfolios may be forced to sell some or all of these holdings in times of equity market stress when they face borrowing or liquidity constraints in other portfolio holdings.

This is an interesting point, especially in light of the fact that gold prices initially fell after Lehman Brothers’ bankruptcy due to forced sales, but we believe that the perception of gold as a safe haven against crashes in any particular asset market is too limited. Gold is an insurance against broader systemic tail risks.

In other words, gold is a safe haven, which protects investors during crises, but not necessarily in normal times of high confidence in the fundamentals of the economy. However, gold is not a safe haven against any particular asset class; rather it is protection against systemic risks – an insurance against the current monetary system based on the fiat U.S. dollar.

We encourage you to learn more about gold – not only why it is a safe haven, but also how to successfully use the shiny metal as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.

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