Is gold still the safe haven it was? Research suggests it has lost its lustre
Gold is no longer the certain safe haven it once was, researchers at the University of Cape Town’s (UCT’s) Department of Finance and Tax have discovered. The yellow metal lost this status as a result of the Covid-19 pandemic, they found.
The research team studied how both “hard” commodities, namely gold, silver and platinum, and “soft” commodities – corn, soybeans, wheat and livestock – moved relative to major US industry sectors, such as energy, healthcare, real estate and tech, when the markets were experiencing turmoil. They gave extra focus to the Covid crisis.
They point out that, when financial markets are in turmoil, investors try to protect their money by investing it across assets that won’t all lose value at the same time. Traditionally, this has been a role of gold – the asset that keeps its value (or even increases in value) as stocks crash. This, however, no longer seems to be reliably the case.
“Using two sophisticated statistical techniques to track how commodities and sectors moved together over time, the researchers found that gold’s protective power against sectors like financials and industrials largely evaporated after the pandemic,” reported UCT. “Silver and platinum told a similar story; both started moving more closely in step with the industries they were meant to protect against, the opposite of what one would want from a safe haven.”
The soft commodities, however, did better. Although modestly, corn and soybeans did demonstrate some real safe haven qualities. Wheat did also, although less consistently. The only soft commodity which failed to show safe haven qualities was livestock.
Modelling of ideal risk-reducing portfolios both before and during the pandemic shows that, during Covid-19, the ideal portfolio had increased allocations of soft commodities such as corn and wheat, across all sectors; investors would have meaningfully cut their risk by increasing their holdings of them. But, when it came to gold, while in some sectors (for example, energy and consumer discretionary) its ideal allocation increased, in other sectors, such as healthcare and consumer staples, its ideal allocation actually decreased.
“The findings suggest that gold’s traditional role as a strong safe haven and hedge asset quietly deteriorated after the Covid-19 pandemic, and that silver and platinum both showed stronger positive interdependence with sectors, exposing investors to decreased protection during the turmoil,” summed up UCT Department of Finance and Tax Associate Professor Chun-Sung Huang. “Soft commodities were not strong safe havens either, but corn and soybeans, and wheat to a lesser extent, showed weak safe haven characteristics. However, as with silver and platinum, livestock showed increased positive coherence with sectors during and after the pandemic, reducing its safe haven and hedge potential.”
The research suggests that gold is no longer a universal shelter for investors in a crisis, and that gold’s usefulness varies considerably, depending on the sector the investor is trying to protect. In future, more diversified mixes of assets, including unglamorous options like corn and wheat, could offer better protection during market turmoil.
