Reassessing the Role of Precious Metals as Safe Havens

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Posted by Arkadiusz Sieron

on Friday, 31 March 2017 08:30

Last month, a new scientific paper about the precious metals was published. What can we learn from it?

In February, Dr Brian Lucey and Dr Sile Li of Trinity College Dublin and Trinity Business School published a new paper entitled “Reassessing the Role of Precious Metals As Safe Havens – What Colour Is Your Haven and Why?”. In that publication, the authors examined safe haven properties of precious metals versus equities and bonds across eleven countries. What are their main findings?

Unsurprisingly, Lucey and Li found that precious metals play safe-haven roles. As a reminder, a safe haven is an asset not correlated or negatively correlated with another asset or portfolio. However, gold is not always the most common safe haven across countries. The yellow metal is the best protection against stock market events in the UK, Italy, France and Japan, while silver turned out to be a better safe haven against the S&P500.

Moreover, the authors tried to identify the determinants of safe-haven properties. In other words, they examined under which political, economic and financial conditions precious metals are better safe havens. Interestingly, they found that precious metals are more likely to perform as safe havens across countries during market turmoil caused by political instability and in high inflation environments. However, when it comes to other factors, the results were mixed for different countries. For example, the decline in consumer sentiment is positive for gold as a safe haven in China, but negative in the U.S.

The bottom line is that gold is traditionally perceived by investors as a safe haven. And rightly so! The precious metals market is increasingly researched and most of the papers, including the newly published article by Lucey and Li, agree that precious metals play as safe-haven assets. What is important here is that the safe-haven properties may differ depending on the metal, the country, and the financial, economic and political environment. It is also worth remembering that it is very difficult to measure the safe haven properties – for example, investors may buy gold as an ultimate insurance against the collapse of the contemporary financial system, not merely as a protection against significant declines in stock and bond prices.

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Thank you.

Arkadiusz Sieron

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.


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