How to Pick & Invest in Safe Haven Assets
Market volatility is a reality, mate. Prices of underlying financial instruments tend to whipsaw wildly from one day to the next, leaving many novice traders and investors with a sense of unease. Market turbulence can be disruptive, and it tends to have a disquieting effect on many folks who are looking to invest their money in the hopes of generating long-term returns. Safe haven assets like gold, bonds, and fixed-interest-bearing accounts are designed to shore up your financial portfolio during volatile trading sessions.
Gold is particularly notable as a safe haven asset that thrives when stock markets experience increased volatility. Market participants tend to hold their money in multiple asset categories including stocks, bonds, indices, commodities, forex, cryptocurrency, real estate, and fixed-interest-bearing accounts. The precise mix depends on the nature of the market at the time. Safe haven assets are not always solid performers; since these underlying financial instruments can fare poorly in different types of bearish markets. As always, it is incumbent upon you as the investor to do your homework to ensure that you have picked the right mix of safe haven assets.
Should You Diversify Your Financial Portfolio?
Your financial portfolio encompasses the mix of assets you have invested your funds in. That age-old aphorism, ‘Never put all your eggs in one basket’ certainly holds true. Investments are finicky things mate, much like a bunch of eggs. If you pick the right batch and nurture them from inception through their growth phase, you will likely enjoy ‘plump and feathery-cushioned’ returns. However, if you have invested everything in one asset category like shares, and markets sour, that basket of investments will leave you with nothing but eggs on your face.
That is precisely why a financial portfolio needs to include a balanced mix of investments. Safe-haven investments serve as a guard against market volatility, since they act as a buffer to downturns in the stock market. Gold and other precious metals are typically thought of as safe haven assets (with a negative correlation to the stock market). Though this often tends to hold true, it is not an absolute correlation all the time. Gold certainly serves as a hedge against stock market downturns, but it does not always offer outsized returns for investors. When the volatility index is particularly high (VIX), gold does not tend to have strong hedge status as a safe haven asset.
Technical analysis of the performance of gold and silver versus shares presents interesting findings. For example, between 1975 and 1985, both gold and silver were trending bullish while the Dow Jones and the S&P 500 had flatlined. The stock markets picked up between 1990 and 2000, and in the same time both gold and silver prices were declining. A significant divergence was noted in the year 2000 when the S&P 500 and the Dow Jones were soaring, while gold and silver prices were retreating.
Things got a little muddied after that, as stock markets, gold and silver moved largely in unison for several years before stock markets tanked in 2008 and gold and silver prices hit stratospheric highs through 2013. The safe haven status of gold was clear in the aftermath of the global financial crisis, but it was to be a pyrrhic victory for gold, since prices quickly tapered off after 2013.
Source: Long Term Trends – Shares, Gold and Silver Prices
Let’s look at some figures which highlight the gold price relative to the levels of the stock markets over time:
- September 1980 – Gold was trading at $676, while the S&P 500 index was at 130, and the Dow Jones was at 932.
- June 2000 – Gold was trading at $285, while the S&P 500 index was at 1473, and the Dow Jones was at 10,448.
- October 2008 – Gold was trading at $810, while the S&P 500 index was at 883, and the Dow Jones was at 9,325.
- September 2011 – Gold was trading at $1,779, while the S&P 500 index was at 1207 and the Dow Jones was at 10,913.
- December 2018 – Gold was trading at $1,249, while the S&P 500 index was at 2567 and the Dow Jones was at 23,805.
In summary: gold is not negatively correlated with the performance of the stock market. During certain times, there will be a correlation, but this is not an ironclad rule. Rather than looking for spurious connections, it is better to diversify a financial portfolio with a variety of safe haven assets such as gold, platinum, and silver in addition to a careful mix of shares, bonds, forex, and other fixed-interest-bearing investments.
Alternative Safe Haven Assets to Consider
The VIX – created by the CBOE (Chicago Board Options Exchange) – is negatively correlated with the S&P 500 index. Technically, it is not considered as a measure of risk; however, this weighted index measures the volatility of markets over the short-term. It is also worth pointing out the VIX is an excellent safe haven ‘investment’ during times of market volatility.
It is possible to trade the VIX through VIX futures and options, and ETNs. The VIX is often dubbed as the ‘Fear Index’ and it usually spikes during times of market volatility. While it is not possible to ‘own’ the VIX, there are indirect means of investing in it, notably futures contracts. You will notice major changes taking place in the stock markets when news of an economic recession filters through, or trade wars are taking place.
Many traders and investors are actively seeking to bolster their financial portfolios with safe haven ‘assets’ when economic downturns strike. It’s not always safe to buy futures contracts of the VIX, because this volatility index projects over the next 30 days as a dynamic, fluid measure. The VIX level will be high when volatility is at its peak and economic uncertainty abounds. It is low when the markets are stable. The positive correlation serves as a perfect bulwark and hedge.
It is noteworthy that the VIX approached a peak at the height of the technology bubble, just before it burst. It also rose dramatically when the 2008 global financial crisis hit the markets. By accessing the VIX through futures contracts, investors have an expectation of delivery at a future point in time based on a price agreed upon in the present. The VIX futures don’t deliver anything – since it is a theoretical concept unlike commodities such as gold, silver, wheat, sorghum, coal, et cetera.
There are many inherent risks with VIX futures contracts, notably contango. If the futures price of the VIX is higher than the present price, then you will always be paying a premium when you buy futures. Put differently, you will be paying more for your VIX futures contracts than you are selling them for. Over time, this safe haven asset will erode into your capital, defeating its purpose as a hedge against volatility. Many experienced investors routinely advise against investments in the VIX, given its volatility. Between December 2018 through April 2019, the index shed approximately 48%.
Other Popular Safe Haven Investments
Despite the horrors of the global financial crisis, and what happened to real estate prices, many people still believe that property is a great safe haven asset over time. Provided your mortgage is not underwater (upside down), the long-term prospects for real estate are generally thought to be secure. Additionally, there are real estate investment trusts known as REITS which are incredibly popular stocks that pay dividends. By providing a steady cash flow – irrespective of stock market volatility, they can also serve the purpose of a financial hedge.
Source: Gold Price – 15 Year Performance of Gold Bullion
Whatever safe haven investments you end up choosing, it’s worth pointing out that the historical performance of gold (trusts, funds, stocks, or physical gold bullion) has been stellar over the years. Consider that the Gold Price/USD performance over the past 5 years has generated returns of 19.33%, and over the past 20 years, returns of 398.85% have been generated. So, clearly, gold is long-term bullish.