Gold loses glitter during pandemic, stablecoin provides some protection

The coronavirus has tested the robustness of asset classes typically considered as safe havens, research shows.

The escalation of COVID-19 from a regional crisis in China to a global pandemic has caused severe damage to economies globally. While stock market crashes historically have triggered a flight to quality assets, particularly gold, US dollars and US Treasury bills and bonds, gold lost its glimmer this time around.

A new research paper from the CFA Institute, COVID-19 pandemic and its influence on safe havens: An examination of gold, T-bills, T-bonds, U.S. dollar, and stablecoin, examines the performance of traditional safe haven assets during the recent market sell-off.

The report was authored by Muhammad A. Cheema of the University of Waikato Tauranga, New Zealand, and Kenneth R. Szulczyk of Xiamen University Malaysia Campus.

The analysis includes stock market indices in the world’s five largest economies, namely the US’s S&P 500, China’s SSE composite index, Japan’s NIKKEI225, Germany’s DAX and India’s S&P BSE SENSEX (BSE).

The paper finds that, in general, the US Treasury bill index (T-bill), US Treasury bond index (T-bond) and US dollar index functioned as strong safe havens during the crisis. This occurred even though the US has suffered the highest infection and death rates in the world.

But the researchers found a surprising result: during the COVID-19 pandemic, gold was sold off along with these stock markets and cryptocurrencies, including Bitcoin.

The analysis measured the correlation between gold and the indexes on a scale from 0, meaning no correlation, to 1.0, meaning total positive correlation. The correlations for the five markets and gold ranged from 0.352 up to 0.611.

Gold and equities move in unison

These results suggest that gold tends to move in tandem with stock markets and therefore might not provide a safe haven against stock market and cryptocurrency losses during a pandemic.

By contrast, US dollar assets, especially government bonds, were found to be strong safe havens. The Treasury bill index acted as a strong safe haven for China’s SSE, Japan’s NIKKEI225, and India’s BSE, and a weak safe haven for the S&P 500, Germany’s DAX index and Bitcoin.

Meanwhile, the Treasury bond index served as a strong safe haven for all stock market indices and a weak safe haven for Bitcoin.

Furthermore, the US dollar index served as a strong safe haven for the NIKKEI225, DAX and BSE, and a weak safe haven for the SP500, SSE and Bitcoin.

The overall pattern suggests that investors who were worried about global growth and future market corrections preferred the most liquid assets of all, such as US Treasurys and the US dollar, to the precious metal.

The authors conclude that gold serves as a hedge against stock market losses only in “normal markets” – it does not act as a safe haven during a market crisis such as the pandemic.

As well, the paper finds that during the recent crisis, Bitcoin moved in tandem with gold; thus, gold does not hedge against Bitcoin.

This finding rebuts claims by some fund managers of gold and gold miner securities that the precious metal is a reliable safe haven asset from financial market volatility.

In fact, that is true only in some circumstances. During March and the height of the stock market sell-off, investors sold out into liquid US-dollar assets, such as Treasury bonds, while gold fell hard. While gold has since rebounded, so too have stock markets.

Tether does better than gold

The COVID-19 pandemic has also provided an opportunity to examine whether “stablecoins”—that is, cryptocurrencies pegged to stable assets such as gold and US dollars—can serve as safe havens against traditional cryptocurrencies.

Since the inception of Bitcoin in 2010, there has not been an opportunity to test cryptocurrencies in any major market turmoil.

The dollar-backed stablecoin Tether served as a “weak” safe haven for all stock market indices and Bitcoin. From that perspective, Tether did better than gold in protecting investors against share market losses. The findings are useful for investors searching for the best safe haven among gold, T-bills, T-bonds and the US dollar index.

Furthermore, the results suggest that investors prefer liquid assets, including stablecoin, to gold during crises. The authors recommend that central banks, financial institutions and regulatory authorities should consider developing financial assets that remain liquid during stock markets crises.