Why do people consider Gold as a “Safe Haven”?
Before We Discuss Gold, What is a Safe Haven?
A safe haven is a type of investment that retains or increases in value during market turbulence times. Investors seek out safe havens to limit their exposure to losses in the event of market downturns. However, determining assets that are safe havens depend on the specific nature of the market downturn. Thorough research and analysis on determining safe-haven assets are essential.
Understanding Safe Havens
A safe haven investment diversifies an investor’s portfolio and is beneficial in times of market volatility. Most times, when the market rises or falls, it is for a short period. However, during an economic recession, there are times when the downturn of the market is prolonged. When the market is in turmoil, the market value of most investments falls steeply.
While such systemic events in the market are unavoidable, some investors look to buy safe-haven assets that are uncorrelated or negatively correlated to the general market during times of distress. While most assets are falling in value, safe havens either retain or increase in value.
Gold as a Safe Haven
For years, Gold has been considered a store of value. Unlike money, Gold is a natural element and scarce. The influence of government decisions such as interest rates does not affect the value of Gold.
Because Gold has historically maintained its value over time, it serves as a form of insurance against adverse economic events. When an adverse event occurs that lingers for a while, investors tend to pile their funds into Gold, which drives up its price due to increased demand.
“Gold is a way of going long on fear.” – Warren Buffet
Especially with the recent pandemic turned a global health crisis into an economic one, and it is uncertain when the world will recover from either of these crises. In such times of uncertainty, Gold is a “safe haven” for those looking for shelter from more traditionally volatile investments, like stocks.
Compared to an investment in stocks, where even the biggest blue-chip companies can (and have) failed, an investment in Gold may seem less risky.