September 10

Safe-Haven Assets: Investing For Safety In Times of Crisis

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When markets are perceived to be uncertain, investors look to lower their portfolio risk levels and migrate towards traditional ‘safe-haven’ assets. They do this by selling stocks, lower-rated bonds and other risky assets and shifting money towards other asset classes that have historically held up during times of recession, uncertainty and crisis. 

They may choose assets that are considered free of market risk, such as money market funds, or they may choose assets that may be risky, but are not highly-correlated with stocks, so that the volatility of their stock and bond market portfolios and their alternative assets tend to cancel each other out. 

Examples of assets in this latter category include gold, silver, and other precious metals, real estate, treasuries and other government bonds.

The Effect of the COVID Crisis on Asset Prices

The recent and ongoing COVID-related economic turmoil is an excellent case in point: The global 2020 stock market decline commenced on February 20th, when U.S. stocks reached an all-time high of Monday, March 9th, when the Dow fell more than 2,013 points, or 7.79%.

The market continued to stagger through the month of March, falling from its February high of 29,551.42 to a low of 18,591.12 on March 23rd. Overall, Q1 2020 was a stock market disaster, with the S&P 500 slipping 18.7% - the worst since the mortgage crisis of 2008, and the Dow falling 23% - the worst quarterly tally since 1987.

When the chips were down, however, gold came through in the clutch, with gold spot prices delivering a solid 5% gain over the same time period.

Related: Investing in Gold? Why Precious Metals Deserve a Place in Any Portfolio

Treasuries also held their value: The US 10-year yield dropped from 1.92% to 0.63% over the quarter, while the two-year yield dropped from 1.57% to 0.23%. As readers know, yields and bond prices move in opposite directions. The two- and ten- year Treasury bonds held their value through the worst of the 2020 stock market meltdown. 

Let’s look at each of these safe-haven assets in turn: 

Birch Gold Group Guide

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Safe-Haven Assets: Gold & Precious Metals

Precious metals have some market risk – the price goes up and down according to supply and demand. But unlike paper assets, including stocks and bonds, it’s almost inconceivable for gold’s value to fall to zero.

The same goes for silver, palladium and platinum, each of which have significant industrial applications driving demand, in addition to investors. Since ancient times, through the rise and collapse of entire civilizations, gold and silver in particular have continued to serve as a universally-recognized store of value.

Prices move up and down, and these metals certainly come in and out of favor as market conditions change. But they have historically served as an effective hedge against uncertainty, and counterweight when stocks and bonds are in trouble.

Gold is also among the most liquid commodities on the market: It’s relatively easy to buy and sell, with a global market. It’s much less risky for institutions to buy a quantity of gold, for example, than to commit to delivery of a truckload of pork bellies.

During the global COVID crisis, gold performed well, overall, rising from $1,574.75 on February 1st to a peak of $2,076.15 on the sixth of August, before investors took some profits and the price settled down to $1,910, as of September 8th, 2020. 

Perhaps more importantly, gold assets did not see the major price collapse that stocks delivered in the early part of this year, as markets priced in the effect of COVID-related economic shutdowns throughout the developed world. 

Gold prices did take a haircut in the early part of March, likely due to forced selling in order to cover margin calls resulting from the stock market crash, which was reaching its most intense phase during that time. 

Looked at more broadly, gold has historically been an effective hedge during several economic crises in recent memory, such as the Great Depression and the 70s stock market declines. For example, the S&P 500 fell 19.4% from September 21, 1976 through March 6th, 1978. But gold prices rose 53.8%, and silver prices rose 15.2% during the same time period. 

Likewise, when the Internet bubble collapsed, the S&P fell 49% from March 27, 2000 through October 9th, 2002. But gold prices rose 12.4%, and silver climbed 14.4% during that period. 

In other economic downturns, gold has not been as effective as a safe haven investment.

For example, gold underperformed stocks during the Reagan recession and stock market decline of 1980-1981. Stocks fell over 27% from November 28th, 1980 through August 12th, 1982.  however, gold’s 46% price decline during this period can be attributed to the massive reduction in inflation engineered by the Volker Fed, which sparked the recession by sharply restricting the money supply.

Moreover, gold’s 1980-82 decline came after the biggest precious metals bull market in history. 1969 closed with gold trading at $41.00 per ounce. By the end of 1980 it was trading at $594.90. 

Gold prices often decline during the early stages of a recession. But historically, gold has and precious metals continued to be extremely effective as a hedge against inflation and hyperinflation all over the world.

Related: Free Investor Guide - How to Crash-Proof Your Retirement with Precious Metals

 Government Bonds

Compared to other types of bonds, government bonds have a built-in advantage against the risk of default: The power to tax, and the power to print currency. Any private corporation could go out of business at any time, and sometimes in spectacular fashion. But as long as their economies continue to function, governments can usually scrape up enough revenue to make interest and principal payments by raising taxes – even if they can’t do much else. 

If that fails, they can print money, though at the cost of hyperinflation of their local currency. 

In that event, all investments held in their local currency suffer, and paper assets are hardest hit.

Such was the case in Germany’s Weimar Republic, when the German government had to resort to printing massive amounts of fiat currency just to cover the war debts required by the Versailles Treaty that ended World War One. 

Related: Physical Gold Vs. 'Paper' Gold: The Pros and Cons

Fortunately, we haven’t seen any large-scale regional currency collapses attributable to the COVID crisis – yet. Government bonds generally held their value worldwide, except for small losses in Japan and the Eurozone. 

However, bonds are vulnerable to inflation: When government has issued a large number of bonds, inflation works in their interests, since they can borrow large dollars and repay the loan in small ones. 

If the market expects inflation to increase, investors will generally press yields downward to cover the impact of inflation. This lowers bond prices and increases risk for bond investors of all types. 

Birch Gold Group Guide

Discover how precious metals like gold and silver can protect your IRA or investment portfolio...

Defensive Stocks

Investors with greater risk tolerance frequently turn to ‘defensive’ stocks in sectors and industries that historically outperform even during periods of recession. Sometimes these stocks can be had at steep discounts – especially when fear reaches its peak and other investors are dumping their shares to buy gold, silver and Treasuries. 

These companies typically provide goods and services that people need regardless of the economic situation, which can range from toilet paper and razor blades to electricity health care. Some of these companies historically paid reliable dividends to shareholders over decades.

However, dividends were no panacea against the systemic stock market decline due to the COVID crisis. For example, the normally recession-resistant health care industry saw an 18 percent reduction in health care spending, as millions of patients put off doctor visits and hospitals were forced to cancel elective procedures. Many longstanding dividend payers were forced to reduce or suspend dividend payments in early 2020. 

Utility stocks fell slightly during the first quarter as their commercial clients were forced to reduce or shut down operations. Utility companies with a residential focus did better than those serving a greater mix of industrial and manufacturing clients.

However, a handful of companies were able to increase their dividend payments during this time. Examples include Johnson & Johnson, Proctor & Gamble, Costco Wholesale, American Water Works, IBM, Pool Corp., Nasdaq, Medtronic, and Newmont Goldcorp, the world’s largest gold mining company. 

Utility stocks fell slightly during the first quarter as their commercial clients were forced to reduce or shut down operations. Utility companies with a residential focus did better than those serving a greater mix of industrial and manufacturing clients. 

Safe-Haven Assets: Investing for safety in times of crisis

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Real Estate as a Safe-Haven

Real Estate sometimes holds up well during recession compared to stocks, though not always. Many real estate investors took it on the chin during the 2008-2010 mortgage crisis.

The COVID crisis also ravaged real estate investors during the first and second quarters of 2020. The toll is most easily grasped by looking at quarterly returns for real estate investment trusts (REITs) during that period. 

Mortgage REITs were particularly hard hit, losing 56% over the first quarter. 

Other hard-hit REIT sectors include: 

  • Retail (-48.7%)
  • Residential (-24.5%)
  • Health care (-36.8%)
  • Office (-28.0%)
  • Lodging and Resorts (-51.3%)

Not all REIT sectors were similarly hard hit: Infrastructure REITs benefited from countercyclical spending on government projects such as highways and airports as governments spent heavily to keep employment up. Data center REITs also held up well. 

Like gold and precious metals, real estate has the advantage of tangibility. It can’t be declared worthless like paper forms of wealth. Barring volcanic eruption or nuclear disaster, it tends to retain some value even in the worst of times. It’s clear, however, that real estate overall cannot be considered the safe haven amidst economic turmoil that it may once have been. 

Cryptocurrencies

Cryptocurrencies such as Bitcoin, Litecoin and Ethereum, are a relatively recent development. They don’t have a long performance track record to examine. 

Bitcoin and similar assets are reasonably secure against direct government seizure, and are insulated from government-caused inflation. Except for government-issued cryptocurrencies, government can’t destroy the value of bitcoin by firing up the printing press.

There’s nothing to print! 

Individual cryptocurrencies have been extremely volatile. The most well-known of them, bitcoin, fell sharply along with stocks during the COVID crisis – though bitcoin also recovered handsomely as stocks started their recovery as well. 

Bitcoin remained positively correlated with stocks during most of 2020 through August, though not perfectly so.

Related article: Bitcoin IRA? How to Diversify Your Retirement with Bitcoin and Other Cryptocurrencies

Bitcoin adoption is steadily moving forward and many believers in the digital currency invest as a way to diversify outside of traditional markets. While it might be too early to consider Bitcoin a true safe-haven asset, there are a few less well-known crypto assets that are designed to maintain a steady value against the dollar, euro, gold or other benchmarks.

These assets are called stablecoins, and can be backed by commodities, fiat currencies or other forms of crypto. 

TetherUSD, USD Coin and Libra are examples of stablecoins linked to the U.S. dollar, while Digix Gold Tokens (DGX) are designed to follow gold prices. 

The market for these products is not well developed or established, and stablecoins occasionally flame out. TetherUSD has come under criticism due to a failure to provide a promised audit, leading a number of leading banks to block Tether transactions, and causing the U.S. Commodity Futures Trading Commission to issue a series of subpoenas.

Evangelists will argue that bitcoin should be considered a safe-haven asset based on the fact that it cannot be confiscated by governments. But while cryptocurrencies have their advantages in a diversified portfolio, it's still too early to consider them much of a safe-haven asset against market turmoil.

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About the author 

Ilir Salihi

Ilir is passionate about personal finance, digital currency, and digital marketing. He's been writing about precious metals and cryptocurrencies since 2013. When he's not publishing new content, he's spending time at home in Washington, D.C. with his family.

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