Why Gold Is a Safe Haven Asset: Meaning, Benefits & Real Examples

Gold is more than just a precious metal; it is the king of the asset class. The yellow metal comes with huge liquidity potential and investment flow. It is known to be an indomitable hedging tool against inflation. This is why the precious metal is not just used as ornaments or jewellery but also valued as a great investment.

In recent times, gold prices in India and globally have exponentially increased, touching an all-time high because of the rising market demand. Investors and buyers see it as a safe haven, especially in times of uncertainty. Historically, gold has proven to be stable and does not lose significant value overnight. It instils trust in investors.

Much like the global market, Indians are echoing this sentiment, which shows in the country’s rising gold consumption.

Why is Gold a Safe Haven Asset?

There are many reasons why gold is considered a safe haven asset in India and globally:

Performance of Gold During Economic Uncertainty

If you follow the historical gold price trend in India, it has shown remarkable performance during economic turmoil. It acts as a financial security blanket for people when the financial market collapses. Gold shows a steady price and brings balance to the financial portfolio.

Real Example:

During the 2008 recession when stock prices dipped and bonds collapsed, gold maintained its worth. Its ability to retain value during tough economic scenarios makes it a great asset. Another example is the COVID-19 market crash in 2020. Most of the financial assets did not perform well during this time, but gold gave double-digit gains to investors. Over a period of time, gold has proven to be a safe haven for investors seeking stability during market volatility.

Hedge against Inflation

Gold is an asset that does not disappoint investors and buyers when the paper currencies devalue. It gives a hedge against inflation and holds its worth. This is why it is seen as a wealth creation tool that protects purchasing power. Its intrinsic value remains intact; that makes it a great long-term investment.

Real Example:

Gold was one of the best-performing assets in India during the 1970s when the country faced a fiscal deficit and low growth. Another modern example is the post-recession era in 2008. Gold outperformed other asset classes during this time. It has constantly proved to be a safe haven when fiat currencies have failed.

Institutional Demand for Gold

There is a huge institutional demand for gold. Central banks buy gold to diversify their reserves. Gold possesses strong liquidity, gives a hedge against inflation, and is free from geopolitical risk and currency devaluation. Its scarcity makes it a high-demand metal and gives it an intrinsic value. Hence, financial institutions like central banks invest in gold as a volatility management tool. It is interesting to know that they are one of the largest buyers of this precious metal, with a great impact on global demand.

Real Example:

The Reserve Bank of India has humongous gold reserves that enable the central bank to diversify its foreign reserves. Other than this, countries with high-income economic groups, like the US, Germany, and Italy, have huge gold reserves. However, the exact gold holding cannot be known.

Supply and Demand of Gold

The market demand for gold keeps rising due to investors' and central banks' push. In India, gold demand is also culturally driven. Most Indian families buy gold on auspicious occasions, such as marriages and festivals. However, its supply is short due to its scarcity. Many factors make gold a rare metal, such as mining challenges, environmental variables, and the expensive mining process. This gap keeps the gold prices high.

Real Example:

There is historical proof that gold prices usually rise during important festivals and events, such as Dhanteras, Akshay Tritiya, and the wedding season in India. This is because the demand for gold jewellery and articles increases, but the supply remains short.

Suggested Read: What are the Advantages and Disadvantages of Investing in Gold?

As gold is universally accepted and offers easy liquidity, people use it as an asset-building tool. They can also buy or sell gold in case of financial emergencies. There are different types of gold prices, such as spot price and future price. Individuals can do transactions at any of these prices as agreed by the other party. If they do not wish to lose their physical gold holdings, they can opt for a gold loan.

Muthoot Finance is a leading non-banking financial institution in India. We offer the best gold loan schemes with attractive features. The highlighted features include no end-use restriction, complete ornament safety, and flexible eligibility criteria. You can keep your gold items or jewellery as collateral to get a gold loan at an affordable interest rate.

We provide easy processing and quick loan sanction so that you can get instant funds. Also, there is no maximum limit to the gold loan amount, provided you have enough gold items for the collateral. We also provide a loan-at-home feature so that you can get a gold loan from the convenience of your home.