Is Gold Still a Safe-Haven Asset?

on May 31, 2012
Listen

On May 29 Seeking Alpha, a website for actionable stock market opinion and analysis, published an article entitled ‘Is Gold a Safe-Haven Asset?’, looking into the evidence that the yellow metal still is, and always will be a safe-haven asset and a long-term investment. The author of the piece, Shaun Connell, is a contributor at Seeking Alpha and an experienced gold trader.

Gold is an investment product that has thrived through years of shifts in financial markets. But now, one of the long-accepted rationales for turning to the precious metal – as a haven from risk – has been questioned. The yellow metal is getting sold off whenever concerns about Greece, sovereign debt and the Euro take over the day’s headlines. As a result many investment writers have recently been claiming that gold is no longer a safe-haven asset as it is behaving in a more closely correlated way to equity and commodity markets. On the other hand, there is the opposite opinion that gold is still a safe-haven asset and nothing has changed in the last year. According to Connell, gold is the same now as it was in the 1970s, 80s, 90s, and the 00s – safe-haven asset, providing long-term prospects for profit. And for those who wonder why gold’s safe-haven status matters, Connell explains with the help of a recently reported IMF (International Monetary Fund) statement: “In the future, there will be rising demand for safe assets, but fewer of them will be available, increasing the price for safety in global markets.”

!m[](/uploads/story/64/thumbs/pic1_inline.png)But what are safe-haven assets and why is there a demand for them? Quoting the author of the Seeking Alpha’s article, a safe-haven asset is a “boring asset that investors flock to out of fear of losses.” “This doesn’t mean all the assets behave identically — not even close. Some are short-term safe havens and others are long-term safe havens,” Connell further explains. And while this explanation is practically correct, a safe-haven asset is an investment that is expected to retain its value, or even increase it, in times of market turbulence. Such assets are sought after by investors to limit their exposure to losses in the case of market downturns.

The explanation above automatically raises the question of why gold should still be considered a safe-haven asset as we all see how the current economic conditions affect the precious metal. The answer Connell gives is that gold has not changed despite its ups and downs, which are normal and do not indicate the metal’s transformation into a risky asset. “It’s important to understand that gold is always a long-term play — it’s an insurance policy, if you will. And no, insurance policies don’t usually make a lot of money but offset potential losses. The same with gold,” Connell explains. Overall, the next months for gold may be uncertain, but the long-term outlook is unchanged – gold remains a safe-haven asset.

Ad

Invest in commodities like Gold, Wheat, Lithium, Oil & more in minutes with our highest-rated broker, eToro.

10/10

eToro offers real assets only, no CFD products. eToro USA LLC and eToro USA Securities Inc.; Investing involves risk, including loss of principal; Not a recommendation.

Visit site

Featured Broker

Looking to invest?

Invest globally in stocks, options, futures, currencies, bonds and funds from a single unified platform, with our highest-rated broker.

Ad
Commodity Mining Precious Metals Stock Market