The pace and gravity of investors fleeing risky assets to safe havens raises the question: How safe are safe-haven assets? Traditionally, precious metals (gold and silver), currencies (US dollar and Swiss franc) and US Treasuries (T-bill and T-bond) are considered safe havens during times of crisis. Furthermore, some researchers say that cryptocurrencies such as Bitcoin have also entered the rank of safe haven assets. However, others see cryptocurrencies as a risky asset rather than a safe haven. Therefore, Baur and Hoang (2020) suggest using asset-backed cryptocurrencies, such as Tether, as a safe haven against Bitcoin during extreme market movements. Tether is the first and largest asset-backed cryptocurrency (aka a stablecoin). Stablecoins are cryptocurrencies anchored to other stable assets such as gold and traditional currencies. Therefore, stablecoins, in theory, would become as stable as anchored assets.
We examine the effectiveness of safe-haven assets during the COVID-19 pandemic and compare their performance during the 2008 global financial crisis (GFC). More appropriately, we ask the question: Having traditional assets that were safe havens during the GCF kept the Their safe-haven status during the COVID-19 pandemic, as times have changed substantially (for example, investors now also have the opportunity to use cryptocurrencies as a safe haven instead of traditional safe haven assets like gold)?
My analysis includes the top ten economies - the US, China, Japan, Germany, the UK, France, India, Italy, Brazil and Canada - as investors prefer to invest in these markets. Assets should earn positive or, at worst, close to zero returns during the financial market turmoil if they possess the quality of a safe haven.
Our first discovery is that gold lost its luster during the COVID-19 pandemic, even though it was a safe haven during the GFC. Table 1 shows the poor performance of gold. The table lists safe haven returns in the days of the ten biggest losses during the COVID-19 pandemic. Clearly, gold yields generally moved in tandem with the stock market's ten extreme losses in the S&P 500 during the pandemic, with seven of gold's ten negative yields. For example, on March 12, 2020, gold lost 4.90% of its value, while the S & P500 index suffered a 10% loss. The obvious question is what happened to gold as a safe haven asset during COVID-19, when investors view gold as a safe haven asset during the GFC? I suggest that investors may have changed their views on gold as a stable asset as they were mentally scarred by investing in gold between 2011 and 2015 when gold lost 45% of its value. The usual precious metal counterpart, silver, did not function as a safe haven in either crisis. Investors should be careful about using silver as a safe haven asset during market turmoil.
My second finding is that the Swiss franc served as a better safe haven asset than the US dollar during COVID-19 even though they were both safe havens during the GCF. As shown in Table 1, five of the ten US dollar returns were negative, but only two Swiss franc returns were negative during the days of the S & P500 index's ten biggest losses. However, the daily returns of the Swiss franc and the US dollar varied between -1.10% and 1.58% per day during the ten extreme losses of the stock market, which are small changes. They helped protect investors' wealth and maintained their safe haven status during COVID-19.
My third discovery is that US Treasuries - T-bills T-bonds - were a safe haven during both crises. As shown in Table 1, Treasuries posted at least seven positive returns on the days of the ten largest losses in the S&P500. An interesting fact is that Treasuries maintained their safe haven status during COVID-19, even as the United States leads the world for the highest mortality and infection rates. Therefore, investors still view the United States as a place to protect their wealth and investments during times of stock market crisis.
Cryptocurrencies account for less than 0.7% of global investments, although they attract a disproportionate amount of attention from traditional and social media. The largest cryptocurrency, Bitcoin, is even labeled the "new gold" by some media outlets. However, our results show that investing in Bitcoin proved to be a high-risk strategy during COVID-19. Its losses outweighed the stock market losses in all ten largest economies in the world. As shown in Table 1, Bitcoin's value fell by 46.5% on March 12, 2020, when the S & P500 index suffered a 10% loss. Therefore, Bitcoin failed miserably in its first real test as a safe haven asset and proved to be a highly speculative asset during COVID-19. In stark contrast, the largest asset-backed cryptocurrency, Tether, was a safe haven for all ten economies against stock market losses during COVID-19. My results on cryptocurrencies suggest that investors should prefer asset-backed cryptocurrencies over non-asset-backed cryptocurrencies.
We conclude that traditional assets like gold and silver failed to protect investors' wealth in the days they needed it most. All safe haven assets are not necessarily safe by default during a stock market crisis. Therefore, investors should exercise due diligence when investing in potential safe haven assets during such a crisis. Our results also suggest that investors prefer liquid and stable assets such as Treasuries and the Swiss Franc over precious metals (i.e. gold and silver). Furthermore, investors are willing to adopt new safe havens like Tether, probably because it is anchored to other financial assets. Finally, my findings suggest that media, policy makers and regulators should exercise caution when classifying Bitcoin as an alternative to traditional investments. Clearly Bitcoin is not the "new gold", as it lost nearly half its value on one trading day during a COVID-19 market selloff. Obviously this does not imply that bitcoin cannot become a safe haven asset, on the contrary, but for now it assumes ever-changing value, even in the short term.
