Why is Gold a Safe Haven?
We’ve all heard of safe-haven assets - something which you can depend on in times of turbulent economic conditions. Gold has been associated with safe-haven assets for a very long time and remains so even today. Let’s look at what safe-haven assets are in detail, and how gold is something you should consider investing in if you haven’t already.
What are safe-haven assets?
A safe haven asset is one that you can make use of when the market is in turmoil. This asset can either be uncorrelated with the existing market, weak safe-haven assets. Or it can be negatively correlated, strong safe-haven assets. A safe haven asset protects its investors during economic flux and retains or even increases in value during this period.
Gold as a safe-haven asset
Through the years, gold has been a physical commodity that has perennially been in short supply, and its value over the long term has only gone up. There is considerable safety to gold as a long-term, safe-haven investment.
Gold is a volatile asset - the value changes quickly, and sometimes these price moves can be significant. Gold has this habit of not doing well when the stock markets are on the rise. A lot of people assume that this makes gold a risky investment. The key here is to hold gold as part of a diversified investment portfolio - gold prices are known to increase during times of economic turbulence. This makes gold a dependable asset to fall back on when you’re in a tight spot.
An example that we can use to exhibit this property of gold to increase in value during economic downturns is the Great Recession of 2007 – 2008. This was a crisis that had a rippling effect worldwide. However, even during the extended state of economic decline, the Great Recession significantly boosted the price of gold despite the other assets performing under par.
Let’s take a look at a few reasons why gold is a dependable safe-haven asset -
Gold’s intrinsic value
The intrinsic value of gold has held true for thousands of years. The primary consumer of gold is the jewelry industry, which accounts for close to 50% of all gold produced. A further 40% is in the form of investments like bullion, gold coins, and companies investing in gold on their client’s behalf.
Another factor that contributes to the safe-haven viability of gold is its limited availability. Estimates suggest the gold that can be economically mined today is roughly about 54,000 metric tons. Considering that no one can make gold, or at least make it cost-effectively if you need gold, somebody is going to have to dig it up. And the digging is going to become progressively difficult as time goes on.
Hedge against inflation
Gold has a stellar track record of being one of the most popular and reliable inflation hedges. Gold is an asset that appreciates in value when there is inflation. In other words, gold is negatively correlated, which makes it a strong kind of safe-haven asset. Considering that the world economy is going through regular upheavals as of late, it makes a lot of sense to turn to gold when the value of currencies are falling.
Liquidity of gold
Gold, as an always in-demand commodity, is highly liquid. This property of gold to be easily sold in times of emergencies makes it a reliable safe-haven asset. It is an alternative to traditional investments like real estate, stocks, and bonds because of its liquidity and transparency. This is especially true in times of economic crises when these traditional assets are more correlated with the stock market. But gold is probably the sole exception to this rule.
Gold has financial superiority
Gold has specific qualities that make it a valuable financial asset. It remains unaffected by economic or geopolitical factors, like exchange rates or policy changes. Even its physical traits, like the fact it does not rust or corrode, making it a dependable ally in your investment portfolio. All these factors together make gold an asset that not just holds value but increases over long periods.
Is gold a safe haven?
While gold has been a viable investment option for a considerable amount of time, the answer to this question is not straightforward. Gold is a very risky asset, meaning the changes to its value can be quick, considerable, and unpredictable. Just investing in gold is not an optimal investment strategy.
On the other hand, gold is ideal for diversification of your investment portfolio. Over the years, the market has always turned to gold when other assets like stocks, real estate, or currency haven’t been doing well.
Gold is uncorrelated with the values of other assets, including real estate, stocks, bonds, and oil. Prices of gold don’t rise when values of other classes do. This is a good reason to consider this as part of a complete portfolio. Especially because the world is much more connected, and most asset classes are highly correlated.
Another thing that people investing in gold as a safe haven need to research is the best method to do so. But once you understand how gold works and its nuances, it can be quite a valuable addition to your investment portfolio.
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