Is gold a safe haven?
When asked why we invest in gold the standard answer often involves, ‘because it is a safe haven,’ or, ‘because it is a hedge against financial collapse.’
Often people base these statement on historical examples many hundreds of years old, but what about in recent history? Has gold proved itself in recent years? And when we talk about a safe haven, do we realise that it is not the same as a hedge?
I look at a paper that answers these very questions. As is so often the case in gold investment, the answers to above questions are not clear cut but the overall message remains the same: gold is both a hedge and safe haven.
The study finds that it is the most developed country stock markets against which the safe haven effect is found. But these findings are at their strongest in daily data, especially when exceptionally rare and extreme shocks take place.
‘These results suggest that investors react to short-lived and extreme shocks by seeking out the safe haven of gold. In this context, gold can be seen as a panic buy in the immediate aftermath of an extreme negative market shock.’
As the authors originally hypothesised, they find that ‘gold is, at best, a weak safe haven for some emerging markets.’ In regard to gold’s role as a safe haven during crises, it performs well during those involving Western markets, but it did not act as one during the 1997 Asia crisis.
As we currently find in the behaviour of the gold futures price, rising uncertainty ‘causes investors to seek out the safe haven, but under extreme uncertainty gold moves with stock markets.’ Presently market participants appear to feel reassured by the occasional forward guidance offered by the Fed, one could therefore argue that we are just in a period of relatively low uncertainty. But as markets begin to realise that tapering or other elements of monetary policy are merely treatments rather than cures, I suspect that uncertainty will begin to rise and will take the gold price with it.
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