Is Gold Still a “Reliable” Safe-haven Asset? - ForexLive

Analysis provided by Ardu Prime

Ardu Prime is a leading provider of Forex, CFDs and crypto custody and exchange services. Ardu Prime gives access to more than 200 CFDs across various asset classes including commodities, US equities, indices, and many more.

Ardu Prime places a strong emphasis on trading education, transparency and inclusivity. In line with these principles, the brokerage provides access to a choice of educational materials, market news and insights to give traders a head start on their trading journey.

In their latest analysis, Ardu Prime market analysts take a closer look at the behavior of gold throughout three pivotal moments for the global economy, identifying both safe haven characteristics and deviations from the standard pattern as they answer some key questions: “Is gold still a “reliable” safe-haven asset?” “To what extent?”

Background

Generally, a safe haven can be defined as an asset allowing investors to preserve wealth in times of financial turmoil. During periods of high inflation and economic uncertainty, investors usually turn to gold “for safety”, considering the yellow metal’s negative correlation with the US dollar^[1] and stocks, which are considered riskier assets. The economic headwinds of the past decade have reinvigorated interest in gold as a potentially good investment.

In their study “Gold and financial assets: are there any safe havens in bear markets?”, Virginie Coudert and Hélène Raymond captured the bullion’s behavior during recession. The authors observe that in the short term, the correlation between stocks and gold is near zero in times of recession, which only qualifies gold as a “weak safe haven.” The same holds true in times of bear markets against most stock indices. However, gold maintains its status as a strong hedge against the US stock index.

Nevertheless, every crisis episode is different, stirring different whirlwinds in the markets. Hence, the behavior of gold as a hedge or a safe haven differs every time. According to Coudert and Raymond, gold moves contrarian to some of the equity markets, in countries such as France, the UK and US in the longer term.

However, the authors conclude, gold has its own risky characteristics in times of economic crisis, despite the diversification it offers. Below we take a look at the gold price movements during the most impactful economic events of the last fifteen years.

The fall of the Lehman Brothers, a momentous event for gold

The downfall of Lehman Brothers propelled gold to fresh tops. Between 2008 and 2018, the precious metal performed remarkably well, with prices shooting up nearly 60% higher on September 11, 2018, compared to September 12, 2008, just before the financial empire collapsed.

Gold's price reached a fresh high at $1,920 in September 2011. When investor confidence took over the markets, gold turned bearish and even sideways, trading in tight range between $1,050 - $1,450 for more than six years.

If we dig deeper into gold’s behavior around the Lehman Brothers’ collapse, we can observe that the bright metal started rallying in the second half of 2007 when the world’s economy began showing signs of forthcoming turbulence.

Yet, when the Federal Reserve saved Bear Stearns investment bank in March 2008, the shiny metal plummeted from $1,011 to $747 on September 11, 2008, just before Lehman Brothers filed for bankruptcy on September 15, 2008, which spurred a massive sell-off in the stock markets, shutting down Wall Street for the first time in history. That is when the Dow Jones index tumbled 504 points, hollowing the global financial system.

After that ominous moment, gold edged slightly higher, from $748 to $766 on September 12, 2008, before rallying until September 29, when it rose to $905. At the same time, almost in tandem with gold, the ICE Futures US Dollar index, DXY, which measures the greenback’s performance against a basket of six major currencies, climbed timidly 0.11% at 80.146 from 80.054, on September 11, 2008. On Friday, September 12, 2008, DXY fell 1.47% at 78.966.

Based on these considerations, we can only agree that gold’s status as a safe haven in times of upheaval is somewhat limited and should be treated with caution. Taking this rationale further, let us analyze what happened after the Lehman moment.

On October 24, 2008, gold lost its shimmer even more, bottoming to $681. Towards 2009, the situation changed again, with the precious metal turning bullish, however, not before September 2009 when it hit $1,000 an ounce. So, how could this happen?

The reason is simple. Being pegged to the US dollar, gold served as an invaluable source of liquidity in times of economic turbulence. In the wake of the Great Depression, as we now call the event, anyone who had invested in gold sold their gold for cash necessary to pay any dollar-denominated debts.

Furthermore, when Lehman was liquidated, it also had to liquidate its positions, including gold. And this is the number 1 lesson Wall Street learned the hard way from what was probably the greatest economic crisis of our time.

Once the economic headwinds subsided and central banks started forging policies to mitigate the effects of the crisis by injecting capital into the worn-out banking systems, gold prices resumed their surge as the sell-off mood ruling the stock markets began to fade. The Fed trimmed interest rates to nearly zero. This was lesson number 2. But the gold price swings did not stop there, as the socio-economic and geopolitical landscape was only just beginning to change, and greater paradigm shifts were looming on the horizon.

Adblock test (Why?)

https://news.google.com/rss/articles/CBMiV2h0dHBzOi8vd3d3LmZvcmV4bGl2ZS5jb20vRWR1Y2F0aW9uL2lzLWdvbGQtc3RpbGwtYS1yZWxpYWJsZS1zYWZlLWhhdmVuLWFzc2V0LTIwMjMwMzMwL9IBW2h0dHBzOi8vd3d3LmZvcmV4bGl2ZS5jb20vZWR1Y2F0aW9uL2lzLWdvbGQtc3RpbGwtYS1yZWxpYWJsZS1zYWZlLWhhdmVuLWFzc2V0LTIwMjMwMzMwL2FtcC8?oc=5

2023-03-30 08:35:00Z
CBMiV2h0dHBzOi8vd3d3LmZvcmV4bGl2ZS5jb20vRWR1Y2F0aW9uL2lzLWdvbGQtc3RpbGwtYS1yZWxpYWJsZS1zYWZlLWhhdmVuLWFzc2V0LTIwMjMwMzMwL9IBW2h0dHBzOi8vd3d3LmZvcmV4bGl2ZS5jb20vZWR1Y2F0aW9uL2lzLWdvbGQtc3RpbGwtYS1yZWxpYWJsZS1zYWZlLWhhdmVuLWFzc2V0LTIwMjMwMzMwL2FtcC8

Bagikan Berita Ini