Examining the safe haven property of gold and major gold-backed cryptocurrencies before and during the Covid-19 pandemic

06 Dec 2022
The Sasin Research Seminar series continues with a fascinating talk by Assistant Professor Piyachart Phiromswad, Ph.D., that looks at gold and its role as a safe haven during a crisis. The lecture began with an explanation of safe havens and the traditional link with gold. Then, Professor Piyachart discussed two studies, one of which showed that 49% of people in the US don’t have retirement savings. Another study by the WEF showed the savings crisis is even more severe in developing countries. Even if people have savings, many don’t invest and are missing out. The problem with savings is that inflation can decrease value, whereas studies show that money invested in stocks, for example, always rises long-term. Professor Piyachart showed a graph of the S&P500 from 1992 to 2022. Over this period, the S&P500 rose over 1000% and even accounting for inflation, there was still an increase of over 500%. There are several reasons why people don’t invest. These include myopic loss aversion, choice proliferation, semantic marker, and the disposition effect. The professor explained there will always be market crises. Recent examples include the dot.com bubble, subprime mortgages, COVID-19, and the inflation crisis. During these downturns, investors need to reduce the severity of the downfall in their portfolio by including a ‘safe haven asset’. There are different categories to consider. A strong safe haven is one whose price is inversely correlated to the market – when the market goes down, it goes up. Investors also use hedging, which is more of an averaging technique. Professor Piyachart then showed the equation used for safe haven analysis. Next was a review of the literature, with a focus on gold, the most famous safe haven. The professor discussed the two most influential studies, which showed gold was a safe haven in developed countries but less so in developing ones. Other traditional safe havens included bonds, the volatility index, and currencies. More recently, people have also used cryptocurrencies, precious metals like silver and palladium, and agricultural commodities like wheat and sugar. The professor then explained what drove the study and showed graphs of the S&P500 during crises, with the price of gold added. He found that during the dot.com and subprime downturns, gold was a good safe haven. However, it was less so during the recent COVID and inflation crises. In particular, gold seems to have lost its safe haven properties for the current inflation crisis. Next, he looked at emerging papers that questioned gold’s status as a safe haven and asked why it was seen as one in the first place. Some argue that it is purely due to perceived belief, so people buy it in a crisis as they are under pressure and don’t have time to consider other options. If that is true, gold might not be a safe haven anymore, as several new alternatives exist. The paper’s contributions were then examined. First, it will re-examine the safe haven property of gold against the S&P500, using data that includes COVID and the inflation crisis. It will also be the first study to look at the safe haven properties of major gold-backed cryptocurrencies. This was followed by the paper’s findings. When it comes to GOLD vs S&P500, the professor found that gold is a weak safe haven at best and a weak hedge. This led to the conclusion that gold might not be a safe haven at all based on two commonly used procedures for testing safe haven property in the literature. He also found that gold-backed cryptocurrencies differ in price and behaviour from gold and each other – they don’t closely track gold and aren’t a reliable safe haven. This was followed by an interesting Q&A session that discussed why the analysis used daily rather than weekly or monthly figures; why portfolios should include safe havens; the advantages of real estate; and the idea that the ‘safe haven’ effect only lasts around 15 days.  
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