The COVID-19 pandemic has severely impacted the financial markets, which has triggered a flight from risky assets to safe haven assets. This column compares the performance of the safe havens across the world’s ten largest economies during COVID-19 and the 2008 Global Financial Crisis. The findings suggest that the character of safe haven assets has changed since the 2008 crisis. Gold, the traditional safe haven asset, has lost its glitter. However, the Swiss franc, the US dollar and US Treasuries retained their safe haven status, and Tether, a cryptocurrency, shows some promise.
The COVID-19 pandemic has evolved from a health crisis into a severe economic crisis as countries around the world closed their economies and prevented the movement of, and interaction between, people as a means to slow the spread of the virus. The economic crisis initially led to a massive selloff in the financial markets as investors transferred risky assets into safe haven assets to protect their wealth (Bofinger et al. 2020, Wyplosz 2020). Consequently, COVID-19 has struck the stock markets more severely than any previous infectious disease outbreak, including the 1918 Spanish Flu (Baker et al. 2020).
The pace and severity of investors fleeing from risky assets to safe havens raises the question: How safe are the safe haven assets? Traditionally, precious metals (gold and silver), currencies (US dollar and Swiss franc), and US Treasuries (T-bill and T-bond) are regarded as safe havens during times of crises. Moreover, a few researchers claim that cryptocurrencies such as Bitcoin have also joined the rank of safe haven assets (e.g. Urquhart and Zhang 2019). However, others view cryptocurrencies as a risky asset instead of a safe haven (e.g. Cheema et al. 2020). Therefore, Baur and Hoang (2020) suggest using asset-backed cryptocurrencies, such as Tether, as a safe haven against Bitcoin during extreme market movements. Tether is the first and largest asset-backed cryptocurrency (i.e. a stablecoin). Stablecoins are cryptocurrencies that are pegged to other stable assets such as gold and traditional currencies. Therefore, stablecoins, in theory, would become as stable as the pegged assets.
In Cheema et al. (2020), we examine the efficacy of safe haven assets during the COVID-19 pandemic and compare their performance during the 2008 Global Financial Crisis (GFC). More specifically, we ask the question: Have traditional assets that were safe havens during the GFC (e.g. Baur & McDermott 2010; Low, Yao & Faff 2016) maintained their safe haven status during the COVID-19 pandemic, since times have changed substantially (for example, investors now also have the opportunity to use cryptocurrencies as a safe haven asset in place of traditional safe haven assets such as gold)?
Our analysis includes the ten largest economies – the US, China, Japan, Germany, the UK, France, India, Italy, Brazil and Canada – since investors prefer to invest in these…