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Which Precious Metal Is The Ultimate Safe Haven?

October 14th, 2013

safe-investmentsJan Skoyles: A new paper from Professor Brian Lucey and Sile Li examines the safe-haven properties of gold, silver, platinum and palladium against US stock and bond declines.

We are used to hearing that gold is a safe-haven, and to some extent silver as well. However we are rarely faced with the idea that platinum and palladium may also be, or that each of the precious metals may perform better as safe-havens than one another at different times.

When we refer to a safe-haven, what do we mean? Generally we are referring to an asset which retains value during times of economic distress. It is viewed as low risk during such periods and perhaps offers higher liquidity also.

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In academia a safe-haven refers to ‘an asset that is uncorrelated or negatively correlated with another asset (e.g. stocks) or portfolio in times of market stress (e.g. a market crash or drawdown), compared with a hedge which is defined as an asset that is uncorrelated with another asset or portfolio on average.’

Of course other assets have been safe havens during times of uncertainty, not just gold, for instance the Swiss franc, the German Deutsche mark, T-bills, oil etc. The financial media class a far wider-range of assets to be safe-havens than perhaps those who invest in precious metals would.

Interestingly, gold’s role as a safe-haven was only first discussed academically in 1999. According to Citak (1999) gold was ‘generally accepted as being a safe-haven since the middle of 1980’.

It may seem odd to look at the safe-haven status of the four precious metals given their vastly different demand and supply fundamentals. However, as the authors point out ‘there are interesting cross-metal interactions as regard to historically closely followed gold-silver ratio and recent examinations of volatility spill over between four metals.’

We generally refer to gold as a long-term safe-haven. You invest in gold and almost forget about it, it will always be there and will be useful when most needed. However in 2010 Baur and Lucey found gold also acted as a short-term safe-haven for about 15 trading days when it acts as a safe haven ‘in extreme market conditions.’

Most of us think of gold as the ultimate safe-haven and monetary investment, less think of silver this way and even fewer of platinum and palladium. After all, for each of these three metals industrial use accounts for 50% of total demand. Not only this but each of the four metals have very different supply fundamentals.

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