Why should anyone invest in a safe-haven asset during this delicate situation?
First of all, let’s try to define what a safe-haven asset is.
The safe-haven asset is an asset whose value is considered intrinsic, i.e. not subject to change depending on a series of events, such as the general level of prices, a country’s default or an emergency such as the one caused by the Coronavirus. This is the main reason why safe-haven assets protect in the event of default or serious financial crisis. Their value tends to remain stable over time and is not affected by external factors. In the event of a crisis, the value of safe-haven assets generally increases, perhaps momentarily, as they are seen as a parachute of one’s funds, in essence, generating greater demand on the market, and therefore an increase in prices. This is exactly what is happening now: the Coronavirus has triggered a race to invest in safe-haven assets and those who know how to exploit the situation are getting remarkable results.
The ultimate safe-haven asset is gold
There is nothing that can protect more in case of default of the national economy, although you have to be careful and buy it at the right time. Gold is in fact highly speculative, so its price is characterized by decisive ups and downs from the buyer’s point of view. Even more so if there is a “disturbing factor” such as the Coronavirus.
Like all investments, it obviously presents risks, along with advantages and disadvantages.
It’s a Safe-haven asset
Few things can safeguard your capital better than gold. Of course, this sector, especially the gold market, is also affected by speculation and by price fluctuations. If you do not get caught up in the rush, however, at the time of sale it’s unlikely to get less than what you spent for purchase. As we said at the beginning of the article, gold is the most important and reliable of all safe-havens.
Provided we wait for the right time, buying and selling gold certainly guarantees a good return, particularly because the growth in the price, as widely demonstrated, is always higher than inflation. Its use in the industrial sector, especially in the electronics sector, generates a growing demand, which is not followed by a dramatic increase in supply, not only because it is certainly not easy to find new gold mines, but also because the extraction of this precious metal has a significant impact on the environment.
Gold cannot fail
In an era like the one we live in, characterised by a financial economy, the term default is increasingly common. Companies, even states, but also currencies can fail when they experience explosive inflation, just think of Venezuela, they turn into worthless paper. But not gold, it cannot fail. In fact, gold is the best shield against default. Let’s think about it, what would happen if, for example, Italy was on the verge of default? Everyone would try to turn their money into gold, thus increasing its value.
It does not offer a constant income
When you put part of your capital into an investment such as physical gold, you do not receive a fixed return, such as if you were buying government debt securities, bonds or other similar financial products. The bars or coins of gold block your capital for a certain period, until we decide to sell. Our blocked capital, then, does not generate an income. It goes without saying that such an investment should be considered for the medium and long term, instead, if you are looking for a return also in the short term, it is better to focus on other sorts of products.
Gold is tied to the currency market
It is especially the value of the dollar that determines the price of gold, and the currency market is one of the most speculative. In other words, the Forex trend greatly influences the price of gold and this must be taken into account if you don’t want to turn an investment into a loss. Many people think, mistakenly, that investing in gold does not involve any risk, but this is not the case. As we have said, there are pros and cons and having to know and follow the currency market closely is definitely a disadvantage of investing in physical gold, since an unpleasant surprise could always be around the corner.
As with any investment, gold has a whole series of advantages and disadvantages: you must therefore always invest by following common sense.