Gold as a Safe Haven

A safe haven is a place where one can find refuge. In investing, safe havens represent assets where you can park your money and expect it to maintain its value regardless of the state of the financial system.

When the economy falters, the demand for safe havens becomes all-consuming for most people. For others with a modest appetite for growth (or possibly with more foresight), safe havens become a core element of prudent diversification. Weathering economic storms is easier when your savings are well-ballasted with safe haven investments long before a crisis hits.

Safe havens don’t have to necessarily be "cash under a mattress." They can be any asset that meets the requirements of liquidity, stable value and growth. Sometimes, real estate plays this role in savings. Remember, though, anyone who owns a home is already exposed to the real estate market -- for better or for worse.

So, to understand where investors and savers alike turn for safety, we have to look at a couple of characteristics they search for.

What Makes an Asset a Good Safe Haven?

A good safe haven doesn’t just protect against one possible problem in the future; for example, it doesn’t just hedge against inflation. Nor does a good safe haven counterbalance the risk of just one asset class.

To understand what makes a good safe haven asset, it’s important to look at what sorts of risks an investor might seek protection from.

Economic Risk

Most investable assets are cyclical or pro-growth assets. They tend to rise in price during the good times, when the economy is booming, unemployment is low and the future seems bright.

In comparison, very few assets are considered countercyclical or risk-off assets. They tend to rise in price when the economy contracts, during recession or financial and political crises.

To protect against all economic environments, a safe haven must offer stability (if not growth) whether the economy is booming or shrinking.

Inflationary Risk

The economic climate isn't the only factor to consider. Any safe haven worth the name must protect purchasing power from inflation. Money itself tends to lose value over time. Sometimes, the purchasing power of a currency can drop in a hurry, such as during a recession or economic crisis. For example, during the Covid pandemic panic the purchasing power of the U.S. dollar dropped an astonishing 13.9% in just three years (January 2020 to January 2023).

This reduction in the value of money, the loss of purchasing power, is inflationary risk.

Even that most traditional of safe havens, the proverbial "pile of cash under the mattress," isn't immune to inflation's corrosive effects. Consider a hypothetical American, born in 1955, who started working at 18. Today, at age 67, they might be considering retirement. That first dollar they ever earned? It's now worth a whole lot less:

As you can see, whether your time horizon is short or long, inflationary risk can have a major impact on your savings.

These two risks are the major ones a true safe haven asset must help protect against, but by no means is this list comprehensive. Other risks include:

Geographical and political conflicts. As governments change and new laws go into effect, the economics of an area or country can change too.

Technological change and risk are also changing the way investors are thinking. New technologies seem to be constantly disrupting whole industries and sectors of the economy. Shifts in technological trends and even in security threats create instability that can alter the long-term trajectory of the economy. Being on the wrong side of a technological change can be a devastating financial decision.

The point is that a safe haven needs to be able to offset all of these risks. Safe haven assets don’t necessarily have to surge in value, so long as they at least tend to maintain their value against inflation.

Necessities are sometimes considered safe haven investments. Energy, shelter, food and water will always be necessary for survival. Consider, though: are these investments liquid, easily converted to cash when necessary? Can you stockpile a sufficient quantity of them to adequately diversify your savings? Do they endure over decades? Do they need special storage?

But diversifying your portfolio with assets that perform fundamentally differently, or even in complimentary ways, is one way that some investors and retirement savers try to protect their future. Some assets are known as being better choices than others to serve as safe havens, offering protection for savers and investors alike from many of these risks detailed above.

Why is Gold a Good Safe Haven?

Gold is often held as the safest of havens. Many buy gold as protection against risk, but they might not realize the full picture of all the ways in which gold may serve a retirement or investment portfolio.

Gold can protect against more than just equity risk or inflationary risk. It has a number of characteristics that make it an everlasting safe haven, with a history of demonstrated performance that has maintained or even grown value over centuries.

Let’s use the risks outlined above as a checklist to see just why gold is such a good safe haven.

  • Counterparty Risk — Most financial assets are an obligation, an agreement by one party to pay another. The chance that a counterparty will fail to meet that agreement, regardless of the reason, is called counterparty risk. Precious metals are virtually unique among modern financial assets in their absence of counterparty risk. When you receive gold or silver from a buyer, the transaction is settled on the spot. There's no further liability or risk involved.
  • Interest Rate Risk — Just about every asset is subject to some interest rate risk. When rates rise, companies have a harder time financing new projects; and even if they can find funding, these companies face more expensive or rigid stipulations to accept the money. The economy may suffer as a result. In contrast, gold is often seen as more valuable in low-interest rate environments or when interest rates rise. The very fact that interest rates change but gold stays the same makes it invaluable to savers worried about the risk of preserving their wealth.
  • Inflationary Risk — This is the most common reason people even own gold. The chart above shows how the purchasing power or value of the dollar has dwindled over the decades, and correlates with gold’s long-term increase in price throughout the same period. That's because, when the purchasing power of the dollar slides, it takes more dollars to buy the same amount of gold. Gold is considered an unbeatable safe haven from the corrosive power of inflation on the value of your savings.

Gold is mined and sold worldwide. This means both geographical or political risk are muted. When rising costs or labor disputes shut down Canadian gold mines, for example, South African and Australian miners just keep working.

Today's gold is fundamentally identical to the gold of the Aztecs and the ancient Greeks. Gold is a periodic element, highly non-reactive to chemical and environmental influences. Its characteristics cannot change over time. They aren't subject to revision by a bureaucracy.

Between its characteristics and its track record, you can see why gold is viewed so often as a safe haven. But that doesn’t mean there aren’t some who find flaws even with gold as portfolio protection, centering around one particular criticism.

Criticisms of Gold as a Safe Haven – Are They Valid?

As noted, there’s no 100% perfectly safe investment in the world. As Dr. William Bernstein has said, "In investing, risk and return are joined at the hip." It's probably better to think of buying gold as a form of saving, of preserving purchasing power, rather than investing, contributing capital to an enterprise in the hopes it will grow.

Gold's price moves based on inflation, as discussed previously, as well as supply and demand. During times of complete panic ( in early 2020 for example) gold can fall in price — just when you need wealth preservation the most.

Remember supply and demand, though. During times of panic, what's the first asset people want to lay their hands on? Cash. Thus, panics frequently result in a brief increase in the purchasing power of the dollar. And we do mean brief. Below, you'll see three small bumps in the dollar's purchasing power, each correlated with a financial panic. Each lasted less than a year:

During a crisis, dollar strength tends to climb

Another criticism of gold is that its price can go down and stay flat for a while. That’s true! Gold's price doesn’t shoot straight up or down. Gold's lack of volatility is one of its advantages as a safe haven asset.

Remember: A safe haven isn’t a high-growth asset you buy today in the hope of waking up rich tomorrow. A safe haven's job is to protect your savings from loss. As part of a diversified investment portfolio, gold does a great job at that.

When the economy craters, most assets plunge. Historically, during recessions, gold held relatively steady in price. Gold doesn’t need to rise in price year after year to be a safe haven; but when other assets collapse, gold usually doesn’t. And that’s the whole point; gold proved its worth as a safe haven during the worst economic times in history.

When you think about safe haven investing, it’s important you are considering what risks you are hoping to avoid. Then you need to consider what kinds of assets you can own to protect from those risks. For all the major ones we know of today, gold can offer just that: an asset that may counteract and possibly even protect against economic risks.

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