Nick Goold
Safe-haven assets are financial instruments or physical commodities investors turn to during market uncertainty or instability. These assets are considered less risky and have a relatively stable value compared to other investments, as their value is unaffected by the same market conditions. They also tend to be liquid, meaning investors can easily buy and sell them without affecting their price.
As well as gold, it's common to regard silver, U.S. Treasury bonds, the Swiss franc, the Japanese yen, and cryptocurrencies like Bitcoin as examples of safe-haven assets.
Why is gold a safe haven asset?
Gold has been used as a safe haven asset for centuries due to its scarcity, durability, and universal acceptance as a store of value. Gold is also not subject to the same market forces as other investments, making it a reliable option for investors looking to hedge against inflation or market volatility.
Here are three examples of when the price of gold surged or crashed due to safe-haven effects:
2008 Financial Crisis
During the 2008 financial crisis, gold experienced a surge in price as investors sought a safe haven from the turmoil in financial markets. In late 2008, gold's price peaked at over $1,000 per ounce, which was more than double its price just a few years earlier.
1980's Crash
In the mid-1980s, gold prices experienced a significant crash after sustained price increases in the late 1970s and early 1980s. The crash was partly driven by decreased inflation rates and a strengthening U.S. dollar, which reduced demand for gold as a safe-haven asset. Between 1980 and 1985, the price of gold fell by more than 60%.
2020 Covid 19 Epidemic
In March 2020, as the COVID-19 pandemic began to spread rapidly worldwide, gold prices surged as investors sought a safe haven from the uncertainty and volatility in financial markets. As a result, gold peaked at over $2,000 per ounce in August 2020, which was a record high at the time. As vaccine rollouts progressed and economic activity resumed, gold prices gradually declined, but they remained elevated relative to pre-pandemic levels.
How Can Gold Be Traded?
Gold can be traded in various ways, including directly against major currencies or as physical bullion, exchange-traded funds (ETFs), futures contracts, and options. Here's a breakdown of how each of these trading methods works:
Forex
Gold is considered a commodity, and many forex brokers offer gold trading as part of their platform alongside forex currency pairs.
Trading gold against other currencies is often called "XAU/USD" trading, where XAU is the symbol for gold and USD is the symbol for the U.S. dollar. The value of XAU/USD reflects the price of one troy ounce of gold in U.S. dollars. So, for example, if the price of XAU/USD is $1,750, it takes 1,750 U.S. dollars to buy one troy ounce of gold.
Retail forex traders can buy or sell XAU/USD like any other currency pair. In addition, they can place trades through their broker's trading platform and use various trading strategies, including technical analysis and fundamental analysis, to make trading decisions.
Traders must know the risks of trading gold, as it can be a volatile commodity with rapid price movements. Therefore, traders should also understand the market well and use risk management techniques such as stop-loss orders to minimize potential losses.
Physical gold
Investors can buy physical gold in the form of bars or coins from reputable dealers. These coins and bars can be stored in a safe deposit box or at a third-party storage facility. However, investors should know that buying physical gold comes with additional costs, such as insurance and storage fees.
Exchange-Traded Funds (ETFs)
ETFs are securities that track the price of gold and can be bought and sold on major stock exchanges. One of the most popular gold ETFs is the SPDR Gold Shares ETF (GLD), which holds physical gold bars and allows investors to buy and sell shares in the ETF.
Futures contracts
Gold futures are agreements to buy or sell a specified amount at a future date and price. These contracts are traded on commodity exchanges such as the Chicago Mercantile Exchange (CME), allowing investors to bet on the price of gold without having to take physical possession of the metal.
Options
Gold options are contracts that give investors the right but not the obligation to buy or sell gold at a specific price and date. Options can be used to hedge against price movements or as a speculative investment.
Investors can buy and sell physical gold from reputable dealers, while ETFs, futures contracts, and options can be traded through online brokers or investment firms. However, it's important to note that trading derivatives such as futures and options come with additional risks, including leverage and the potential loss of principal. Therefore, as with any investment, it's essential for investors to carefully consider their goals and risk tolerance before investing in gold or any other asset.
What Factors Drive The Gold Price?
There are several key drivers of gold prices that F.X. traders should pay attention to:
Global economic and political conditions
Economic and political events can have a significant impact on gold prices. For example, geopolitical tensions, inflation concerns, and central bank policies can all affect the demand for gold as a safe-haven asset. When economic and political conditions are uncertain or unstable, investors seek refuge in safe-haven assets like gold, which can drive up its price.
Interest rates and currency values
Interest rates and currency values often influence gold prices. When interest rates are low, the opportunity cost of holding gold decreases, which can increase demand for the commodity. Additionally, a weaker currency can make gold more attractive to foreign investors as it becomes cheaper.
Supply and demand factors
Like the price of any commodity, gold prices are influenced by supply and demand factors. For example, changes in mining output, central bank buying and selling, and consumer demand for jewelry and industrial uses can all impact gold prices.
Technical analysis
Forex traders often use technical analysis to identify trends and patterns in gold prices. Common technical indicators in gold trading include moving averages, Bollinger bands, and Fibonacci retracements.
USD strength or weakness
Gold prices are denominated in USD, so movements in the USD can significantly impact gold prices. For example, when the USD strengthens, it can put downward pressure on gold prices, while a weaker USD can boost demand for gold and increase its price.
Gold's market capitalization
The total capitalization of the gold market is difficult to determine precisely, as it includes both physical gold and various gold derivatives. However, according to the World Gold Council, the total value of above-ground gold stocks was approximately $13.3 trillion as of Q1 2023.
Compared to other safe-haven assets, the total market capitalization of gold is relatively high. For example, the market capitalization of the cryptocurrency Bitcoin, which is often touted as a safe-haven asset, was approximately $540 billion.
Gold's future as the primary safe haven asset
While gold may be replaced as the primary safe-haven asset at some point, it is unlikely to happen soon. Gold has been used as a safe-haven asset for thousands of years. It has a long-established reputation as a reliable value store during economic and political uncertainty.
Gold's popularity as a safe-haven asset is based on several factors, including its scarcity, durability, and historical track record as a store of value. Additionally, gold has a low correlation with other asset classes, which means that it can provide diversification benefits to investors looking to reduce their portfolio risk.
While other assets, such as Bitcoin and other cryptocurrencies, have emerged as potential safe-haven assets in recent years, they have yet to demonstrate the same reliability and stability as gold. Furthermore, many investors may hesitate to invest in these assets due to their short track record and high volatility.
That being said, market conditions can change rapidly, and it's always possible that a new asset could emerge as a primary safe-haven asset in the future. However, for the foreseeable future, gold will likely continue to be considered the primary safe-haven asset.
