What is a Safe Haven?
A safe haven is an investment that is expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns. However, what appears to be a safe investment in one down market could be a disastrous investment in another down market, and so the evaluation of safe haven investments varies, and investors must perform ample due diligence.
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 of time. However, there are times, such as during an economic recession, 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. Some examples of " Safe Heavens" are:
- Gold
- Treasury bills (T-bills)
- Defensive Stocks
- Cash
But today we are going to discuss about "Gold".
Globally, prices of gold rose sharply on Monday, 2nd March, 2020. On MCX, gold futures prices rose by Rs. 500 or 1.22% to Rs 41,901 per 10 gram. However, despite Monday’s rise, gold prices remained down at about Rs 2,000 per 10 gram as compared to previous week's record highs of Rs 43,788 per 10 gram.
Gold prices reached record highs on 24th February, 2020, of $1,688.66 per ounce. This was the 7-year high. Fear over the economic fallout from the corona virus has unnerved global stock markets, with S&P 500 index suffering its worst week since 2008. This has increased the demand for safe haven assets such as gold. Although gold prices fell from its record highs on 29th February, 2020, some analysts attribute the fall to investors being forced to sell to cover their losses in other asset classes like equities. Please refer the chart below.
Other assets considered safe havens also saw gains, with benchmark US 10-year Treasury yields falling to a record low, while the Japanese yen rose to its highest since October against the US dollar.
Economists believe that feeble global equities, weak US dollar, and rising economic fears due to corona virus are expected to keep gold prices in the positive territory in the short term.
Gold prices could also be supported by expectations of rate cuts by the US Federal Reserve. However, higher level of profit booking and possible reduction of demand for physical gold from top consumers in India and China would weigh down the prices.
The Federal Reserve’s chief Jerome Powell last week had issued a statement of reassurance by saying that the US central bank will use “our tools" to support the economy. Economists believe this may be construed as a strong signal of a coming interest rate cut. Lower interest rates boost non-yielding asset classes like gold.
It will, therefore, be interesting to observe if gold prices continue to rise, amid the uncertainty around the spread of corona virus.
In my view, one should not take decision due to panic in market. One should stay invested in stocks, and one can rather prefer to invest in Mutual fund which has a mix of Equity, Debt and Gold.
Sources: Various publications
Disclaimer: The information provided herein is based on publicly available information and other sources believed to be reliable, but involve uncertainties that could cause actual events to differ materially from those expressed or implied in such statements. The document is given for general and information purpose and is neither an investment advice nor an offer to sell nor a solicitation. While due care has been exercised while preparing this document, we do not warrant the completeness or accuracy of the information. We will not accept any liability arising from the use of this material. The recipient of this material should rely on their investigations and take their own professional advice.
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