top of page
Image by Dmitry Demidko

Market volatility and investors

flocking to safe haven assets   

September 2020


In recent times, crypto-currency has joined gold as a “safe haven” investment to offset investors’ perceived systematic risk. As a precious metal, gold has tended to retain its value and has been used – both as direct currency and a value repository – for thousands of years; conversely, Bitcoin and other cryptocurrencies are merely decade old but have big aspirations to one day replace conventional currencies as a medium of exchange. Although both gold and Bitcoin are “mined”, their real world or virtual value is based mostly on speculation or as a safe haven asset class.

What is a Safe Haven? 

Assets that are expected to retain or increase in value in turbulent market conditions are sometimes referred to as safe haven assets and are sought after by investors to limit their exposure to losses in economic downturns.  They tend to be negatively correlated to the general market at times of financial distress. Thus, as the value of most assets falls, safe haven assets either retain or increase in value.

Gold as an Investment

While the value of gold has been demonstrated to remain constant over a long period of time, maintaining its value for literally thousands of years, over shorter time periods it cannot be relied upon as store of value as it is too volatile. Experts in the field suggest that gold should therefore account for no more than 10% of any investment portfolio comprising bonds, stocks or derivatives.

However, as a safe haven, gold can make sense: during the last three months of 2018, for example, the S&P GSCI Gold Index gained 7.2%, while the stock market plummeted by nearly 14%. Even in the most recent bear market, when the stock market fell by 34%, there was only 2% decline in gold index.  

“Gold has traditionally been one asset that people go to for safety,” says Ed Moy, chief strategist at gold retailer Valaurum and head of the U.S. Mint from 2006 to 2011.

Regardless, the volatility of gold is a double-edged sword for investors, as its value can go in either direction. In the Bank of America Global Fund Manager Survey, conducted in August 2020, about two thirds of fund managers believe that gold is overvalued. This sentiment has risen sharply from 0% the previous month and is the highest since 2011. To put this in context, a prominent gold ETF, SPDR Gold Shares, gained 9.6% and 6.6% in 2011 and 2012 respectively, before witnessing a loss of 28.3% in 2013. It went on to deliver negative returns for the next two years. 

Thus, gold should not be viewed as a mainstay investment but rather as a marginal seasoning in any portfolio. 


Bitcoin as an Investment

Bitcoin was created in 2009 after the sub-prime mortgage crisis as an electronic payment system or digital currency beyond the control of any government. Despite not being legal tender, Bitcoin gained popularity – especially for transactions conducted entirely virtually – and has prompted the introduction of a veritable panoply of other virtual currencies, collectively referred to as Altcoins.

While gold has been used for centuries, Bitcoin is only a decade old. The person or persons who created this digital currency are known as Satoshi Nakamoto and their identity is still a mystery. However, in its short life span, Bitcoin has experienced wild swings in price rising to a high of almost $20,000 per Bitcoin in 2017. 

The pronounced fluctuations in cryptocurrency price are even greater than those seen in gold pricing which calls into question its status as a store of value. While “The entire crypto ecosystem has matured substantially,” according Stephen McKeon, associate professor of finance at the University of Oregon, “The question has moved from ‘will this survive’ to ‘how big will this get?’”

Certainly, the popularity of cryptocurrency is beginning to gain traction with larger institutional investors. Fidelity, for example, has announced plans to create a Bitcoin fund. Although, the fund will only be available to large institutional and accredited investors initially, rising institutional acceptance of Bitcoin as an asset will gradually result in increased Bitcoin liquidity and a smoothing out of the extreme price fluctuations.

Bitcoin and Gold as Safe Haven Assets.

Investors tend to gravitate towards gold and Bitcoin when governments and central banks around the world intervene to rescue struggling economies. Fundamentally, if governments reduce the value of their currencies by printing money and simultaneously reduce interest rates close to zero, investors will respond by investing into assets that are not controlled by central governments. Furthermore, when interest rates are low, especially when they become negative after inflation adjustment, investors are generally less attracted to assets that offer yields, such as bonds and dividend-paying stocks. 

When investors flock towards safe haven assets, therefore, a “bandwagon effect” emerges, as the price of the asset keeps rising as new investors flock to the asset class. The major danger here is that this momentum will inevitably slow down sooner or later leaving investors who bought at the height of the market with the unenviable consequence of having to sell low.  

Covid-19 Pandemic and Safe Haven Assets

The spread of coronavirus has caused an unprecedented recession around the world, leading investors to flock towards safe haven assets. One of the improbable effects of the Covid-19 pandemic, in the wake of tanking oil prices, the subsequent price war between the OPEC members the overarching financial crisis, has been the idea that Bitcoin and other similar cryptocurrencies, should perform similarly to gold or other commodities as safe haven assets and behave countercyclically. 

The prices of an ounce of gold and a bitcoin have increased drastically since the start of pandemic. The price of gold climbed to $2,000 an ounce for the first time in August and has increased by more than 30% this year as coronavirus cases continue to rise in U.S. Similarly, the value of cryptocurrency has also increased considerably: despite falling by almost 50% to $5,000 in the months of February and March, it has risen to close to $11,500 in August 2020. 



Gold and bitcoin reflect different stages of how people think about money. Scarcity of gold makes it precious; for thousands of years it has been used as currency and holds value because of investors’ historical and psychological attachment. Gold is definitely a more mature asset. Cryptocurrencies, such as bitcoin, along with its blockchain technology, may one day be a viable replacement for currency but as yet are not developed enough to be stable. 

Well-diversified portfolios need neither gold nor Bitcoin and these investments represent the height of speculation. As such, they are not rational investments, regardless of risk tolerance or age. Investors seeking to make a speculative bet on either gold or bitcoin should limit their exposure, at most, to single-digit percentages of their portfolios as there is simply insufficient evidence to suggest either asset will deliver more consistent returns than a traditional strategy emphasizing stocks and bonds.

About the author(s)


Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.

bottom of page