Gold Price Today : Is Gold Still A Safe Haven Asset?

Gold Price Today : Is Gold Still A Safe Haven Asset?

Gold Price Today : Is Gold Still A Safe Haven Asset? : Dr. Kazemi mentioned the problem of estimate and actual correlation in his paper ‘Did Correlations Among Asset Classes Approach One During COVID-19 Crash?’.

In this paper, he basically points out that estimated correlations among different assets will not accurately affect the real correlations. Because of the volatility, we often underestimate the correlations during calm periods and overestimate them during the crisis periods. 

Considering this problem, I came up with the way to best minimize Dr. Kazemi’s concern by grouping the data by week.. In this case, the short period will eliminate the inaccuracy caused by market volatility as much as possible. To test it out, I chose gold as an example. We all know that gold is considered as safe haven assets. But is gold really safe? I doubt it. Let’s see what historical data tell us. 

The three periods I chose are 2020, 2008 and 2000. All of these experienced market crashes. These dramatic declines, by traditional economics, would cause a rally in the price of gold. In fact, it was a totally different story. The correlation between gold and S&P 500 became quite volatile. In 2008, the correlation even reached 1 for two weeks. How ironic it was!

It ‘s hard to tell any pattern of gold during the financial crisis. But, apparently, gold is more likely to be a “safe haven asset” when the market is relatively stable. One reason is the liquidity trap.

As the market changes dramatically, the assets will quickly lose their value and the investors need money to deal with the margin call. As a result, they have to sell out their “safe haven assets” to increase their liquidity. The sell force pushes the price to decrease along with the market and causes the positive correlation. 

Gold Price Today : Is Gold Still A Safe Haven Asset?