Is Gold a Safe Haven Asset?

Independent researchers and asset distribution experts increasingly agree that gold is a hedging tool and a safe haven asset. Many financial specialists believe the yellow metal should be mandatory in investment and savings portfolios.

A wealth of scientific and independent research confirms the nature of gold as a safety asset and emphasizes its importance in investment and pension portfolios. This part of investment fund distribution is designed to increase profitability and combat the overall level of volatility. However, not everyone agrees with this statement.

What is a Safe Haven Asset?

These are investments whose value remains stable or grows during market instability. Investors choose safety assets to limit potential losses in case of market downturns. For example, investors often shy away from gold when the yield on US government bonds rises and turn to precious metals during periods of uncertainty.

However, the concept of a "safe harbor" changes along with market conditions, and what is considered a "safe" investment in a declining market can be a catastrophic investment in a rising market.

Examples

XAUUSD, Daily

Consider a recent situation. In early October 2023, gold, having reached a strong support level at 1810.00 and Fibonacci level 61.8, began to rise, changing the trend to bullish after a prolonged seven-month decline.

US30, Daily

At the same time, the US30 index continued to decline. Initially encountering resistance at the level of 34 000.00 and Fibonacci level 38.2, it fell to Fibonacci level 61.8 and below. The trend reversal occurred only in early December 2023.

The escalation of the conflict in the Middle East influenced the price of gold. Investors, in conditions of uncertainty, preferred defensive assets.

However, it's essential to remember that gold is only sometimes a reliable hedge asset.

XAUUSD, Weekly

Since March 2022, despite ongoing global tension and recession risks in major Western economies, the precious metal has lost almost 20% following the US indices. Forming a double top, the trend shifted to a downtrend, breaking a strong support level at 1701.00.

US30, Weekly

Gold also heavily depends on the level of real interest rates or the difference between the nominal interest rate and inflation. While the US regulator was raising rates and inflation was growing, holding funds not in dollars but in alternative assets like gold became less attractive, leading to a decline in the price of precious metals. Global instability coincided with the cycle of the key interest rate's growth in the US the second factor outweighs the first. If the Federal Reserve did not raise the rate, increasing the yields of other protective instruments (US bonds), we would have predominantly seen gold rising.

What is next?

XAUUSD, Weekly

Anticipating a softening of the Federal Reserve's rhetoric and a potential interest rate reduction, there is a risk of weakening the US currency. This could pave the way for further growth in assets such as gold and more risk-intensive ones, such as indices. In the event of a breakout of the triangle and consolidation above the level of 2050.00, one can expect a continuation of the movement towards 2200.00 dollars per troy ounce.

US30, Weekly

Examining the US30 chart reveals that the instrument has attained an all-time high. As the asset consolidates above the 37 000.00 level, an anticipated rebound from both the 36795.00 level and the Fibonacci level suggests a potential target at 40 000.00.

Conclusion

Despite gold often being considered a safe haven and hedging instrument, investors should be aware of the volatility of market conditions. Factors such as geopolitical events, economic indicators, and changes in interest rates can significantly impact the price of gold. It's important to understand that what is considered a safe asset in some circumstances may pose risks in others. Therefore, before considering gold as a reliable hedge asset, it is crucial to carefully analyze market conditions, monitor economic changes, and assess risks. Decisions made without due attention can lead to financial loss, eliminating the potential benefits of this precious metal in an investment portfolio.

Author: FBS Analyst Team

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