Revaluating safe havens: The effectiveness of traditional assets during extreme crises?

Abstract

This paper investigates the role of traditional safe assets in portfolio construction and their hedging capacity during extreme crises, with a particular focus on precious metals. We examine the interplay between fear and the performance of traditional safe assets, using the fear of infectious disease during health crises as an example. Our findings reveal that while precious metals like gold offer protection against moderate levels of fear, they fail to safeguard portfolios during periods of extreme fear. Conversely, the 10-year Treasury note consistently serves as a robust safe-haven during such periods. These results underscore the importance of understanding investor sentiment and behaviour during crises, as well as the need for context-dependent risk management strategies. This research contributes to the broader understanding of the function and limitations of safe assets in the face of growing systemic risks, including geopolitical conflicts, climate change, and pandemics.