A safe haven asset is defined as one that remains stable or increases in value when the stock market drops. Traditionally gold and US bonds have been considered to be safe haven assets. Both of these asset classes are highly liquid and are therefore accessible to large institutions.
Correlation between bonds and the stock market
The chart above shows the US10 year bond yield (blue line) and the S&P500 (bars). The lower the bond yield the higher the price, and therefore the lower the perceived risk.
Inverting the bond yield scale as in the above chart, gives us an indication regarding the direction of movement in price. Note that this isn’t the same as bond price itself. Up until the year 2000, both the stock market and bond prices were generally positively correlated (red), meaning that they moved in the same direction. After the year 2000 bonds prices and stocks generally moved in opposite directions. Bonds therefore clearly acted as a safe haven, particularly during large declines in the stock market.
Correlation between gold and the stock market
The relationship between gold price and the stock market is not so clear. The above chart shows that when the S&P500 (bars) declined, the gold price (yellow line) rose in 2001 but in 2008, gold initially plummeted but then bounced back up before the stock market bottomed. The correlation coefficient (red) flipped between positive and negative, suggeting that gold has not consistently acted as a safe haven. At least not in the way that we have defined it.
Correlation between gold and US bonds
If both US treasuries and gold act as safe havens, we can expect these two asset classes to be positively correlated. The above chart suggests that it wasn’t until 2007 that that became the case.
Safe haven asset yield
If you store physical gold yourself, it has a zero yield. Storing physical gold professionally incurs a fee (either a fixed fee or a fixed percentage of the value of your holdings)., and is therefore negative yielding. Note that the percentage itself is usually fixed and doesn’t change with the gold price. From the early 1980’s to the year 2000, the gold price pretty much flat-lined, therefore the capital gains were minimal or non-existent. That, in combination with the fees associated with owning gold, meant that gold just wasn’t an attractive investment.
Historically, negative yielding sovereign debt had never occurred…until 2012. Globally, negative yielding debt recently hit a whopping 17 trillion dollars. With this new phenomenon, bond holders are effectively paying for the privilege of lending their hard-earned cash to the government. There are a few reasons why, surprisingly, this is quite attractive to investors. Sovereign bonds are viewed as risk-free safe havens, they perform better than stocks during a market crash and so the small negative yield is viewed as being worth the price paid. Importantly, institutional investors such as pension funds and insurance companies don’t have a choice, they are mandated to hold investment grade bonds. Unlike with gold, the yield is directly linked to the bond price therefore the higher the bond price the more negative the yield, therefore the cost of holding it is greater. That doesn’t seem to bother investors since the capital gains offset the costs.
Purchasing power of safe haven assets
The chart above shows that before 1971, the purchasing power of gold oscillated above and below one, with small variability. However after 1971, there were large swings in the purchasing power of gold. Note that the purchasing power of gold never fell below one after 1971, and had a general upwards trajectory. This suggests that holding gold is a safe haven in terms of maintaining purchasing power.
The chart above shows the 10-year treasury yield in nominal (blue line) and real (red line) terms (i.e. adjusted for official inflation rate). When inflation occurred in the 1970s, the bond yield increased (i.e. bond prices decreased). Additionally, inflation meant that the real bond yield was negative, so the bond holders were losing on both counts. When nominal bond yields turn negative, there are profits through capital gains but will these fiat profits offset the loss of purchasing power of the US dollar? They may well do so for a while, but you need to be pretty smart to work out when that flips.
When it comes to safe haven assets, sovereign bonds and gold are two different animals. It depends on how you define safe haven. If purchasing power is key, gold could be considered to be the superior safe haven asset.