Safe Haven Investments

A safe haven investment is one expected to retain, or even increase its value in times of great market turbulence. This is easily confused with a hedge but the two types of investments are vastly different. Read more...

A safe haven investment is one expected to retain, or even increase its value in times of great market turbulence. This is easily confused with a hedge but the two types of investments are vastly different. Where a hedge is an asset that is uncorrelated with the performance with stocks and bonds on average, a safe haven is an asset that is uncorrelated with stocks and bonds in the event of a market crash.

For many people, gold is seen as safe because it is limited in amount and its value cannot be manipulated by the interest-rate decisions of any country. It is also a physical asset, meaning it can’t be printed like money and so its value cannot be changed in any way. Furthermore, because gold has a reputation as a safe haven, investors tend to pile into it as soon as market volatility occurs, which means that its price increases when extreme events occur.

When it comes to safe havens, even gold is losing it shine. “Once felt to be a safe haven, gold has actually been more volatile in recent years, with sharp upward and downward swings in price caused by changes in investor attitude.” An example of a situation like this is the major changes in stock markets around the world.

So considering the current market volatility and a recent tailwind for the precious metal, it’s natural to wonder whether gold is worth any investor’s attention.

Appeal as an alternative: As a “risk-off” trade, it’s easy to understand the appeal of gold right now.

Hopes for a bottom: In addition to the safe-haven demand that gold typically enjoys, recent reports out of India have predicted a surge of up to 70% in jewelry demand during the festive season there. Like all goods, once gold sees a steep-enough drop in pricing, it will also see a spike in demand as folks think they are getting a big bargain.

Considering the trouble elsewhere and the positive signs for gold, the recent buying is understandable.

Why the run won’t last : All this sounds bullish for gold on the surface. But when you look deeper, this “good news” is not what it seems.

Low or negative inflation rates coupled with a continued strong currency is what sent gold into its current 40% plunge from its 2011 highs, so it’s impossible to think the persistence of those factors adds up to a positive for gold.

If you want risk, stick with stocks preferably those with little exposure and a decent track record of growth. If you don’t want that risk, consider short-term bonds or bond-like stocks.

Also what it is worth remembering is that, while any assets that are seen as safe havens are appealing when a crisis is in process, they are generally not good value when stock markets are rising. And since none of these assets is completely guaranteed to keep their value when the stock market falls, there is really only one recourse for the ultra-cautious.

Cash is really the only safe haven but currently it offers no real return at all, since safe havens are becoming ever harder to find, the best way to ensure that you minimise your risk is to diversify your portfolio, ensuring that you have a good mix of different assets that behave in different ways during different economic cycles. This should include bonds as well as shares, as well as holding a proportion of your assets in cash.