Which Metal Is The Ultimate Safe Haven?

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.

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

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.’

Just Forget About It
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.

Despite this, Lucey and Li say, ‘there are interesting cross metal interactions as regard to historically closely followed gold-silver ratio and recent examinations of volatility spill over between the four metals.’

Increasing Correlation
Interestingly, in the last decade the four metals have become increasingly correlated, ‘gold has a unidirectional volatility contagion effect on all other precious metals and silver has a similar effect on platinum and palladium.’ i.e. as gold begins to climb, the others follow, whilst silver has a similar influence on platinum and palladium.

That said, the ‘underlying drivers suggests that there are times when the safe haven properties of each…differ.’

The paper then outlines the specific times when each of the metals have acted as safe havens against US stock and bond markets.

It's Not Always About Gold
They conclude that US results show that there are times when the platinum, palladium and silver act as safe havens when gold fails to do so. For instance, after the 9/11 attack and the beginning of the Afghan war platinum provided protection against US stock falls, when gold was not a safe-haven. And at the end of 1997 and 2007, silver and palladium acted as US bond safe haven when gold did not.

Gold did perform as a safe-haven against US equity in Q1 1993, Q2 1996, Q4 1997 and post-crisis in Q4 2009, Q2 2010 and Q4 2010 (post-European sovereign debt crisis). In contrast, silver only acted as a safe-haven in Q4 2009 and Q1 2010 against US equity. Similar results are seen in relation to the US bond market.

They find that while gold is a safe haven for longer periods of time than any other of the PMs, further investigation is required. Interestingly the authors find that when all three precious metals act as safe haven, on some occasions the other three precious metals perform better than the yellow metal.

The results of the paper provide a valid argument for portfolio diversification when it comes to the precious metals, ‘holding a spread of these metals might provide additional safe haven protection for equity or bond investors.'