Are precious metals effective safe havens, preserving capital when stocks and bonds crash? In their January 2017 paper entitled “Reassessing the Role of Precious Metals as Safe Havens – What Colour is Your Haven and Why?”, Sile Li and Brian Lucey assess whether four precious metals (gold, silver, platinum and palladium) are safe havens relative to stock market indexes and 10-year government bonds across 11 countries. The 11 countries are: U.S., UK, Germany, France, Italy, Switzerland, Canada, Japan, China, India and South Africa. They focus on stock and bond market crashes specified as daily returns in the bottom 5% of respective return distributions over the entire sample period. They define weak and strong safe haven behaviors based on moderate and high statistical confidence in crash protection, respectively. They consider different economic and political causes of stock and bond market crashes. Using daily returns for stock market indexes, 10-year government bond indexes and precious metals spot markets for the 11 countries, all in local currencies, during January 1994 through July 2016, they find that:
- Precious metals are weak safe havens about 33% (31%) of the time for the lower 5% of daily stock (bond) market returns. Strong safe haven behavior is very rare (less than 1% of such daily crashes).
- There are times when one precious metal is a safe haven while others are not, and no one metal is consistently a safe haven over time, across countries and for both stocks and bonds. On average, gold is not the most frequent safe haven.
- Precious metal safe haven behaviors vary by country. For example:
- Precious metals perform best as safe havens in the U.S., Germany, Italy, Switzerland and South Africa.
- In the U.S., silver is the most frequent effective safe haven for stocks (50% of daily crashes, compared to 31% for gold) and government bonds (28%, compared to 26% for gold).
- There are times when metals are safe havens for stocks but not bonds.
- Precious metals are more consistently a safe haven when the cause of stock and bond market crashes is economic policy uncertainty than when the cause is financial/economic stress.
In summary, evidence indicates that precious metals are largely unreliable as safe havens relative to short-term equity and bond market crashes.
Cautions regarding findings include:
- The approach is gross, not net. Trading frictions for physical (spot) precious metals may be substantial, thereby weakening any safe haven benefits.
- Tests use contemporaneous (unexploitable) relationships between precious metal returns and either stock market or bond market returns. The authors do not address anticipation of equity and bond market crashes or reasonable allocations to precious metals.
- The authors specify return thresholds for stock and bond market crashes based on the full sample period, thereby incorporating look-ahead bias into crash specifications.
See also “Gold as Hedge, Safe Haven and Downside Risk Protection”, “Comparing Precious Metals as Safe Havens” and “Comparison of Gold Alternatives”.
