What Color Is Your Haven? Reassessing The Role Of Precious Metals As Safe Havens
Trinity Business School, Trinity College Dublin; University of Ljubljana – Faculty of Economics
Trinity College Dublin
January 29, 2016
Gold’s role as a safe haven asset has been intensively studied in recent years. This article extends the previous literature and examines the safe haven properties versus equities and bonds of four precious metals (gold, silver, platinum and palladium) in a time-varying matter and across four countries : US, UK, Germany and Japan. Results indicate that the metals each play safe haven roles ; there are times when one metal is while another may be a safe haven against an asset. Consistent with previous findings, gold may not always be the safest haven.
What Color Is Your Haven? Reassessing The Role Of Precious Metals As Safe Havens – Introduction
The precious metals market has attracted many studies in the last half decade. There are a number of studies focusing on gold’s role as a hedge in portfolio diversification, starting from Jaffe (1989) and ChuaJess and WoodwardRichard (1990)Gold as a safe haven has also been examined (see as examples Baur and McDermott (2010), Baur and Lucey (2010), Coudert and Raymond-Feingold (2011) ) with a general finding that it can act as such. .Other precious metals’ (Silver, platinum palladium) hedging ability have also been studied which relates to their low correlations with an equity index and their role as a natural inflation hedge. Hillier, Draper, and Faff (2006) concludes that all three have low correlations with stock index returns, particularly during periods of high stock market volatility; therefore, portfolios that contain precious metals perform significantly better than standard equity portfolios. In this note we investigate gold, silver, platinum and palladium’s performance during extreme stock and bond market movements across four countries US, UK, Germany and Japan.
The term safe haven often refers to the assets for investors to park their money during periods of uncertainty. A large number of assets have been suggested as safe havens at various times in various studies (see Lucey and Li (2014)) . Baur & Lucey (2010) provides the first operational definition of safe haven which refers to an asset (e.g. stocks) that is uncorrelated or negatively correlated with another asset or portfolio in times of market stress (e.g. stock market crash or political disturbance). Thus an asset may not be a hedge but may be a safe haven.
Model and Data
We follow the standard approach to testing for a safe haven , as outlined in Baur and Lucey (2010). For example, to test gold safe haven properties against equities, the following equations are estimated. If the parameters in are negative and statistically different from zero, gold functions as a safe haven.
The decision rules follow Baur & McDermott (2010):
- If the parameters in (2) are non-positive, gold acts as a weak safe haven for the market under study;
- If the parameters are negative and statistically different from zero, gold functions as a strong safe haven.
We examine the US S&P 500 index, UK FTSE 100 index, Germany MDAX Frankfurt index and Japan NIKKEI 225 index, and the benchmark 10-year government bond index of each country. Our precious metal data are London gold bullion price in US$/Troy ounce, the London silver bullion price in US$/Tory ounce, the London Free Market platinum price in US$/Troy ounce, and palladium price in US$/Tory ounce. Precious metals price in sterling, euro and yuan are converted by using the daily spot exchange rate, all sourced from DataStream. The data consists of 5938 daily observations from the period between 29 March 1991 and 31 December 2013. We concentrate in this analysis on a 5% drawdown.
This paper expands Lucey & Li (2014)’s analysis of time-varying safe haven status of gold, silver, platinum and palladium against US stock and bond indices to UK, Germany and Japan. Rather than using rolling regressions as in Ciner, Gurdgiev, and Lucey (2013), we follow the approach in Lucey & Li (2014) and estimate quarterly estimates of the coefficients. For each metal and stock/bond pair we estimate eq 1-3 over a quarter By using quarterly data, the results are clearer and simpler as regard to which precious metals are safe haven during which periods. For ease of exposition we show a series of graphs. These graphs indicate in what quarter do we find each precious metal to be a strong safe haven (using the Baur and McDermott (2010) definition) against bonds or equities in each country.
Safe haven evidence
US evidence has already been discussed in Lucey & Li (2014). In summary gold acts as safe haven against U.S. equity in Q1 1993, Q2 1996, Q4 1997 and after the recent global financial crisis in Q4 2009, Q2 2010, and most recently in Q4 2010 following the European sovereign debt crisis. Silver is only a safe haven immediately after the global financial crisis in Q4 2009 and Q1 2010. Platinum provides protection against U.S. stock falls in 2000 and 2001 when the Afghan war begins and after the 9/11 attack when gold is not a safe haven. On average, gold is the strongest safe haven in that its price increases significantly for 12% of the time, followed by palladium 10%, silver 8% and platinum 8%.As regard to safe haven status against the U.S. bond market. Gold is a safe haven at the end of 1992, Q1 1998, more frequently from Q3 2001, after the 9/11 attack to 2004 when the Iraq invasion begins, at the beginning of the global financial crisis in Q2 2008 and following the European sovereign debt crisis in Q3 2010. Gold’s status as a safe haven against U.S. bond market is generally clustered with the other three precious metals as asafe haven around the same time especially from 1992 to 1994, in 2004, 2008 and 2010, except for Q3 2001 when only gold provides protection. Silver enters the safe haven status at the same time with gold in 1992, 1993, 2003, 2004 and 2010, while one quarter earlier than gold responding to the global financial crisis in 2007. At times gold is not a safe haven while the others are, such as in the end of 1993 and 2007, both silver and palladium are safe haven but gold is not. Overall palladium offers the most hedge in 13% of the time when bond market is under 5% quantile, followed by gold 10%, platinum 6% and silver 5%.
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