How To Use Gold as a Safe Haven

Abstract

Safe haven assets play a crucial role in safeguarding portfolios during times of turmoil or crises. Gold is widely accepted as a safe haven asset for stock market portfolios. However, it is unclear whether it should be held continuously as a strategic (passive) investment or whether it is sufficient to hold gold only during crisis times as a tactical (active) investment.
Our analysis unveils that gold is the perfect tactical safe haven investment under conditions of certainty that allow for optimal timing. However, it cannot be as efficiently used under uncertainty because it is impossible to consistently predict a large shock or a crisis. The rebalancing occurs either too early or too late, diminishing the benefits of using gold as a safe haven. We conclude that gold's best use in a portfolio is as a strategic (passive) investment. Tactical (active) investments lead to higher returns and lower risk but require optimal timing.

Keywords: safe haven, gold, tactical investment, strategic investment, hedging

JEL Classification: C43, G01, G11, G12, G15