For years, people have been talking about gold as a safe haven asset. To those familiar with finance, that saying makes a lot of sense. For others, perhaps not so much, warranting a bit of an explanation.
The Purpose of a Safe Haven
Not all assets can become “safe havens” by default, as certain criteria need to be met. There is a good reason why these safe haven assets are rare, as it is a very select “club”, so to speak. These investments are expected to not only retain their value during financial uncertainty, but also increase when markets grow turbulent.
A lot of financial instruments simply do not fit this bill whatsoever. Fiat currencies, for example, are volatile and prone to losing value – and purchasing power – Stocks are not safe haven assets either, as their value can fluctuate wildly for no apparent reason. In fact, they are perhaps the opposite of a safe haven, due to their global exposure.
Before any investment vehicle can act as a safe haven asset, investors need to conduct their due diligence. Following advice from experts is not always the best way to go. Whereas most people agree gold is a safe haven asset, not everyone thinks along those lines. All opinions regarding this matter are valid.
What Makes Gold Stand out
The first box to be checked is whether the safe haven asset diversifies the average investor’s portfolio. In the case of gold and other precious metals, that is certainly the case. Gaining exposure to these markets requires a bit more effort than traditional options, such as stocks or bonds.
Second, the investment vehicle needs to show signs of resilience when the going gets tough. Any vehicle that is seemingly decoupled from stock markets and political turmoil can make the safe haven assets list.
Third, having scarcity as one of the main selling points is always a plus. Unlike stocks, fiat currencies, or bonds, gold has a certain degree of scarcity. It is being pulled out of the ground in significant quantities yearly, but not all of that is thrown on the open market either. For this same reason, a cryptocurrency like Bitcoin can also act as a safe haven asset.
Last but not least, gold has performed extremely well as a store of value. It is not an asset that will skyrocket in value overnight. However, it will not drop in value out of the blue either. This degree of stability has made it a safe bet in the eyes of many.
One has to keep in mind that the lit of safe haven assets will not remain the same indefinitely. Market conditions can affect any asset in different ways. Gold, while not linked to stocks and bonds, can still be influenced by the overall market sentiment. That too can turn bearish or bullish at any given moment.
As such, it is possible there will be a time when gold and other precious metals are no longer a safe haven. It seems unlikely today, but no one knows what the future may hold.