A safe haven is an asset class which increases or retains its value during an economic downturn or a time of crisis. Investors park their money in such safe havens to limit their losses during tumultuous times. Gold has historically been regarded as the quintessential safe-haven asset class for maintaining wealth, and it has kept this status for decades.

During the recent crisis in the Eurozone linked to Grexit and the slowdown of the Chinese economy, gold has not behaved like a safe haven. Investors did not rush to Gold, and it fell along with equity markets. This may be the first sign that gold is losing its status as a safe haven.

The following discusses reasons why gold might be losing its safe-haven status and explores other assets which may be a better bet during unfavourable economic situations.

1. Gold is a hedge against high inflation. During the initial days of monetary loosening, fears of inflation were high, which led to gold hitting a high of $1,923 in April 2011. However, in the last four years, fears of inflation have abated and the world is facing signs of deflation. The lure of gold has dissipated in this deflationary environment.
2. Gold is supported by buying from central banks. Bullish gold traders hoped to see a large buy figure from the Chinese Central Bank since rumor indicated the bank would be purchasing a large quantity of gold. When China announced its bullion assets holding of 1658 metric tons in July 2015 – an increase from 1054 metric tons in 2009 – traders were disappointed, as the figures were much lower than expected.
3. Gold and silver have been used as currency since ancient times. Even though the use of gold as a currency stopped, the gold standard was followed in many countries for some time. After it was abolished by the US in 1933, demand of gold by central banks declined since printing of currency was no longer backed by gold.
4. With the bull run in gold from 2000-2011, many speculators entered the gold markets via gold ETFs and various funds. The arrival of speculators changed the behavior of gold from a safe-haven asset to a more speculative commodity.
5. Gold usually moves inversely to the US dollar. With the expectation that the US Fed will raise interest rates, the dollar is expected to rise, putting gold under pressure. As the cycle turns from monetary loosening to monetary tightening, investors will prefer to park their money in the dollar rather than in gold.
6. A monetary-tightening cycle causes interest rates to rise. Money deposited in the bank earns higher interest. Investors prefer higher-earning deposits over buying a gold bar, as the bar doesn’t give dividends or interest on the funds invested in the gold.

Alternative safe havens

With gold losing its status as a safe haven, investors will have to look for alternative asset classes to park their money as a hedge for economic downturns. A few options being explored as safe investments are as follows:

1. As the base currency of the world, the US dollar is a good option. With the amount of debt on the US Fed balance sheet, however, the true value and overall safety of the dollar has become somewhat questionable.
2. Agricultural land can be considered a safe haven because land cannot be manufactured or produced. The population in the world is increasing and the requirement for food grains will increase. Rising population will likely lead to an agricultural commodity bull market, but a deflationary environment could negatively impact or at least put a ceiling on the value of land. Moreover, agricultural commodity prices are dependent on climatic conditions and are difficult to forecast.
3. Cash has always been the king, and keeping money stacked under the mattress or in a vault is also an option. But if central banks fall behind the curve with the timely withdrawal of stimulus, inflation is definite. Having your money stashed in a vault in an inflationary environment will diminish its purchasing power by the time you are ready to use it.
4. The Japanese yen and the Swiss franc were also considered safe havens in the past. However, with the actions of Abenomics and the unpegging of the Swiss franc earlier this year, these currencies have also demonstrated wild swings, thus compromising their status as safe havens.

These are changing times. Gold is losing its status as a safe haven. Investors scrambling to safeguard their wealth will likely anoint other asset classes as safe havens. Over the last few years alternative asset classes such as art, wine, and hard liquors have emerged as debatable storers of value in the minds of some enterprising investors. Digital cryptocurrencies such as bitcoin have also emerged as a medium of exchange. Nonetheless, some of these novel safe havens are riddled with the same problems affecting gold and more. If it sounds too good to be true, it probably is!