During times of market stress, it is often a good idea to look for safe haven investments. One of the safest places to invest is gold. This is because it is a commodity that has never gone down in price.
Evidence points to gold as a safe haven investment during times of market stress
Various academic studies have pointed to gold as a safe haven investment during times of market stress. In fact, the most recent of these studies suggests that gold may be a stronger hedge than bonds.
The first study to explore the safe haven property of gold was done by Baur and Lucey in 2010. They examined data from the United Kingdom and the US and found that gold acts as a hedge against equity and debt markets. However, they suggested that this function was limited to the United States during extreme stock market conditions.
The second study to examine the safe haven property of gold was performed by Ghazali et al mentioned here https://www.goldirasreviewed.com/. They studied specific crisis periods, such as the 2001 recession, the COVID-19 period, and the 2007-09 financial crisis. They discovered that gold served as a hedge only at a 5% threshold. They also observed that gold’s safe haven value was short-lived, and that it was not a reliable asset during the nascent stages of a crisis.
Similarly, the safe haven capability of gold was demonstrated by Coudert and Raymond-Feingold (2011). They found that gold qualified as a safe haven against stock indices in the United States, the United Kingdom, and Europe. In particular, they noted that gold has the most significant effect when the US money supply changes.
Lagged values of gold returns predict value of market returns
Investing in gold has become an attractive way of protecting investors from risk. During periods of economic stress and negative interest rates, gold is seen as a safe haven. Various scholars have examined the time-varying dimensions of the relationship between gold and other investment variables. Understanding these dynamics is crucial for policy makers, portfolio managers, and other market participants.
In their study, Gokmenoglu and Fazlollahi (2015, forthcoming) posit that gold is an effective hedging instrument. They also claim that gold serves as a significant choice of trading assets. They analyze returns on US stocks, government bonds, and gold. They find that these return indices are correlated. They identify the positive and negative skewness of the returns.
Another study explores the relationship between gold and stocks. It uses quantile regression to estimate the relationships in the tails of the data distribution. It concludes that the effect of stock market volatility on gold and vice versa is moderate. It also finds no evidence of return spillover. The authors recommend that investors assign a higher value to changes in gold prices.
In a similar vein, Baur (2013), Baur and Schulze (2005), and Mensi et al. (2014) also investigated the relationship between gold and stocks. They found that past stock returns provide a good predictor of the current gold return. They conclude that, in times of turmoil, an investor may redeem stock for gold. They also suggest that the investor may use both assets in a single portfolio.
Testing whether gold is a safe haven
During the recent financial crisis, some investors have questioned whether gold is still a safe haven. This paper uses a conditional independence approach to test whether bonds, stocks, and gold are safe havens when other investments are included in the portfolio.
Traditionally, investors seek safe havens when markets are stressed. In the past, these investors have often shifted to government bonds or gold. However, this has not been the case in the last few years.
In the late 1990s and early 2000s, the 10-year Treasury was considered a safe haven. During the Great Recession of 2008, gold fell along with other risk assets. Some investors were forced to sell liquid assets to raise cash.
The theory of the gold price was that when riskier assets fell, investors would dive into gold. This proved to be inaccurate. In fact, the relationship between gold and the S&P 500 was often inverse.
This study examines the performance of four precious metals during periods of extreme market stress. These metals include gold, silver, platinum, and palladium. This paper also examines the properties of each metal.
The most obvious property is that gold acts as a safe haven. Its prices rise when stocks and bonds fall. The purpose of maintaining a position in gold is to protect against losses during times of extreme market stress.