Is Gold a Safe Haven Asset?


A safe-haven asset is a financial instrument that is expected to retain, or even gain value during periods of economic downturn. These assets are uncorrelated or negatively correlated with the economy as a whole, which means that they could appreciate in the event of a market crash.

There are certain characteristics that assets often have that contribute to their reputation as a safe haven which is most likely gold, which includes:

  • Liquidity: the asset needs to be easily convertible to cash, at any time
  • Functionality: the asset needs to have a use that will continually provide long-term demand
  • Limited supply: the growth of supply should never outweigh the demand
  • Certainty of demand: the asset is unlikely to be replaced or become outdated
  • Permanence: the asset should not decay or rot over time

For example, moving out of ‘riskier’ assets could cause a sudden drop in the market price as investors to flock to safe havens, which means that you might consider getting out of any long positions or going short. But if you’re confident that you can identify the safe havens of the moment, then there is the potential to profit from rising prices.

There is no definitive way to trade the patterns of safe-haven assets, as it all depends on your motivation. But whether you are looking to take advantage of price movements or adjust your own positions to protect yourself from falling prices, it is crucial to understand the prevailing market sentiment surrounding safe-havens.

When people think of a safe haven, they will most likely think of gold. As a physical commodity, the price of gold is not often influenced by the decisions of central banks on interest rates, and unlike paper currencies, its supply cannot be manipulated by actions such as printing.

Many consider the decision to buy gold a behavioural bias, based on gold’s history of backing currencies and as a store of value. The theory goes that because gold has historically been considered a safe haven, investors swarm to the precious metal when there are signs of significant market collapse. Gold as a safe haven has become a self-fulfilling prophecy.

Market downturns are an inevitable part of market cycles, which means that it is in an investor’s best interest to prepare themselves for them as much as possible.

In times of financial crisis, assets that are viewed as safe havens tend to outperform the vast majority of markets. Although safe havens are primarily used by investors to protect the value of their portfolio, it is important for traders to be able to identify safe-haven assets and use this understanding to anticipate price movements and implement their own strategies.

Not every safe haven will have all of these characteristics, so investors have to make a judgement about the most suitable safe haven for the economic climate. It is important to remember that what makes a good safe haven for one market downturn may not show the same results in another, so investors must be clear about what they want to gain from using safe-haven investments.