Safe Haven

A safe-haven asset is an asset that is uncorrelated (weak safe-haven) or negatively correlated (strong safe haven) with another asset or portfolio in times of market stress or turmoil. So, a safe-haven asset protects investors during crises, but not necessarily during normal times. Hence, a safe-haven asset is expected to retain its value or even increase in value during times of market turbulence when most asset prices decline.

Gold as Safe Haven

Gold is commonly considered to be a safe haven in times of financial or political uncertainty, since it is not at risk of becoming worthless, unlike fiat currencies or other assets bearing credit risk. Indeed, according to Baur and Lucey (2010), gold is a hedge and a safe haven for stocks, but not for bonds. The authors also found that gold works as a safe haven only for a limited time, for around 15 trading days. This suggests that investors buy gold on days of extreme negative returns and sell it Baur and Lucey (2010) when market participants regain confidence, and the volatility is lower. Thanks to its safe-haven status, gold is used as a portfolio diversifier.

Investors should remember that the gold’s safe-haven features may change over time, for example because the yellow metal becomes more popular as an investment to protect against equity market turmoil. Investors who hold significant amounts of gold in their portfolios may be forced to sell some or all of these holdings in times of equity market stress when they face borrowing or liquidity constraints in other portfolio holdings. This is what we saw in the aftermath of the Lehman Brothers' bankruptcy, and later again in the aftermath of the coronavirus pandemic, and the following stock market crash (see the chart below), due to the forced sales. 

Generally, the perception of gold as a safe haven against crashes in any particular asset market is too limited. Gold is an insurance against broader systemic tail risks. In other words, gold is a safe haven, which protects investors during crises, but not necessarily in normal times of high confidence in the fundamentals of the economy. However, gold is not a safe haven against any particular asset class; rather it is protection against systemic risks – an insurance against the current monetary system based on the fiat U.S. dollar.