The Safe Haven Channel Theory

A safe haven investment expands an investor’s inventory and is favourable during times of market instability. Most market fluctuations happen for brief periods. Nevertheless, there are situations when the market’s slump extends, such as during an economic recession, and market structural occurrences are inescapable during moments of crisis. Many investors try to use the safe-haven channel theory for assets that are uncorrelated or negatively correlated with the maximum value. Let us learn about how GDP is calculated and how gold affects the economy. 

Examples of Safe Haven Investments

A variety of financial securities are regarded as safe-havens.

Government Issued Bonds:

A government bond refers to a financial product with a fixed rate of return. The government or enterprises issue bonds to raise more money. Bonds are like loans. Any investor can lend investments to authorities, and these authorities are responsible for lending the borrowed amount. A government bond is considered a safe haven asset since it is risk-free and has minimal volatility.

Treasury Bills:

These bills are considered free of any market risks because the government returns the amount borrowed from the investor. As a result, investors prefer to rush to these securities during a perceived economic crisis.

Currency:

Some currencies that are safe for investment are dollars, yen and francs. Currencies are appealing assets during an economic slump because of their high liquidity, independence from other nations, stable political structure, and the ability to be backed by a country with favourable economic development forecasts.

Foreign nations also tend to keep currencies in their reserves, indicating the security of keeping such currencies and the strong confidence in the currency’s country of origin’s creditworthiness.

Cash:

Cash is widely regarded as the sole genuine safe haven during a market slump. On the other hand, cash provides no actual return or income and is severely impacted by inflation.

Features of Safe-Haven Assets

1. Constant demand: An asset should be able to retain strong demand in the long run, making it difficult to replace with another investment.
2. Constancy: The asset’s quality does not decay or deteriorate with time. 
3. Limited supply: The stock’s supply must be smaller than its demand for the asset’s value to be maintained, due to scarcity.
4. Wide liquid assets: Investments easily convertible to cash.

How is GDP calculated?

The gross domestic product rate can be calculated using three methods:  

1. Output: The entire value of commodities and services generated by all sectors of the economy, including agriculture, manufacturing, energy, construction, the service sector, and government.
2. Expenditure: In this, the values of all the expenses a family or organisation uses or invests in machines, equipment, etc. Expenditure value can be estimated by calculating the difference between all the export values.  
3. Income: income can be defined as the values of profit or salaries provided by a company.

How Does Gold Affect the Economy?

The production and use of gold are primary drivers of India’s gold market. Both have a substantial influence on economic value addition, employment, foreign exchange profits, and the trade balance. According to a PricewaterhouseCoopers analysis commissioned by the World Gold Council, gold contributed more than $30 billion to the Indian economy.

The importance and influence of gold are represented in the gems and jewellery business, which provides around 7% of the country’s GDP and 15.71 per cent of India’s total goods exports. In the fiscal year 2014-15, the gems and jewellery industry accounted for 13.30 per cent of total merchandise exports in the nation.

Let us look at how gold helps the Indian economy in several ways.

1. Manufacturing of gold: Currently, 5-10% of India’s gold production industry may be considered organised, with large-scale facilities that did not exist ten years ago. Nearly 65 per cent of the jewellery produced in India is handcrafted, and the great bulk of the industry is still characterised by tiny workshops employing two to four goldsmiths.
2. The effect on the current-account deficit: While oil imports are mainly responsible for the country’s significant current account deficit (CAD), India’s massive gold imports are also somewhat to blame, as gold is the second-biggest component of the import bill.
3. Exports: India is among the leading exporters of gems and jewellery. The industry is said to be important to the economy since it contributes a significant portion of its overall foreign reserves.
4. Refining of gold: In recent years, India’s long-established refining business has experienced a significant increase in new capacity.
5. Mining for gold: Gold mining has the potential to contribute significantly to India’s long-term socio-economic growth.

Conclusion

The volatility, the lowest for gold relative to the indexes in 2002 and 2008 but not in 2013, might be a safe-haven asset. Our findings support Baur’s (2012) indication that gold price volatility increased during times of financial turbulence, such as in 2008 and 2013, when the standard deviation of gold was more prominent than during the long-term 30- and 20-year periods. Investors want to have safe-haven assets to reduce risk or loss due to a market crash. We learned how GDP is calculated and the safe-haven channel theory.