Is there such thing as a safe investment during periods of uncertainty? Historically, safe-haven assets such as gold tend to perform well in unpredictable market atmospheres. While most modern investment tools are risky in nature, safe-haven assets tend to maintain their value and even appreciate, during economic crises. This is especially true during periods of inflation.
What is a safe-haven asset? A safe-haven asset is an asset that is considered to be less risky or unstable during periods of uncertainty.
Safe-Haven Investments to Combat Inflation
At some time, all investors need to find a hedge against inflation, market volatility and other aspects of economic uncertainty. Stocks, bonds, and real estate are all good safe-haven assets, but historically gold has beaten all of these.
Gold is considered to be a smart hedge against the risk of inflation. During inflation, the value of gold rises in part because it is priced in U.S. Dollars. The Dollar is a fiat currency, and inflation occurs when excess money has been printed, and it devalues the currency already in circulation. This phenomenon tends to cause gold to appreciate in value. Gold retains its intrinsic value.
Gold is not fiat, and the amount of it available in the economy cannot be controlled by the government. It is not printable. Government decisions on increasing interest rates and money supply strengthen golds price by weakening the value of the Dollar.
The Difficulties of Safe Haven Assets at Present
During the initial stages of the pandemic, gold did not provide the same level of cumulative return as it did during the financial crisis 15 years back. The drop in the increase in the price of gold was likely caused by unforeseen fear and panic faced by investors.
Globally, the Covid-19 vaccination initiative is keeping most of the economies open, which in turn has reduced the demand for safe-haven assets. Such a situation has not created enough tension among investors to bulk-buy into gold.
It is expected that to combat inflation, the interest rates are likely to increase. In such a scenario, the value or storage of gold will not offer any yield to investors. Tight monetary policies placed by any government will reduce the value of many assets which could include gold.
At the moment, the storage of gold is still seen as a refuge by investors, however, buyers are getting better returns on other investments. Stocks and the real estate market have been quite lucrative due to the unprecedented growth and lack of correction within the US markets.
Bottom Line
With the world still recovering from the ongoing Covid-19 pandemic, investors are looking for safe-haven assets like stocks, real estate, and gold to invest in. However, one thing sets gold aside from the others. When a market correction occurs in the United States, assets like stocks and real estate will decrease, but gold should retain its value.
