Gold Vs US Dollar: Which is the Better Safe Haven?

Both gold and US dollar are known as safe haven assets that investors often rely on during a crisis. While both seem to be equally strong, which one is actually better?

Since the early days, both gold and the US dollar have consistently been regarded as safe havens for investors in a turbulent market. But when we're actually in the middle of the turbulence, it surely is hard to predict whether an asset is reliable enough to be a safe haven and save us from being doomed.

The year 2020 has proven to bring an unprecedented level of uncertainty since it caused huge dynamics in the economic world. The old safe havens of gold and the US dollars saw unpredictable volatility, which actually doesn't happen often in history.

Both gold and the US dollar are strong assets, but they have different characteristics. Gold is priced in US dollars, so when the dollar gets stronger, it takes fewer dollars to buy an ounce of gold. This means that the price of gold tends to fall when the dollar gets stronger.

Such a situation definitely makes us pause and think whether it is time to reevaluate safe-haven assets to hedge portfolio risks. So, are gold and US Dollars still worthy to be called investors' safe havens? Let's find out the truth.

How Gold Became Popular

Gold is probably the oldest asset that consistently attracts investors until now. Gold is often considered the safe haven of investments because of its finite supply, making it a scarce asset. Therefore, gold is regarded as a highly precious commodity and store of value.

Apart from that, gold is regarded as precious because it is seen as a "real" asset that physically exists and is tangible, unlike electronic money. It is also virtually indestructible not like paper money.

Historically, gold played a crucial monetary role; the gold standard had led many central banks to own gold reserves to back their domestic currencies. Even now, central banks still hold on to vital gold reserves.

The World Gold Council reported that central banks and state governments hold 17.2% of all gold mined through history in the form of coins or bullions. In addition, central banks have also been net buyers of gold over the past years, using the precious metal to diversify their reserves and minimize risks.

Gold is also considered capable of hedging risks against inflation, given that a rise in the cost of goods and services tends to affect the value of the fiat currency.

When a central bank prints more money to stimulate the economy, investors fear inflation would happen and begin to flock to gold. So gold has been proven to be able to hold on to its value over the long term, which makes it a great safe-haven asset.

Gold during the COVID-19 Pandemic

Throughout the years, the price movement of gold has been fairly predictable. Typically, the price would rise during periods of economic uncertainty while other assets would most likely decline. However, this is not the case in March 2020.

What we saw was quite an anomaly. It seemed like investors were so clouded by fear and uncertainty, they began selling their gold ownership to cover their losses in other holdings. Indeed, the global stock markets crashed right after the announcement of the COVID-19 pandemic.

However, it didn't take long for gold to begin climbing its way up. During the seemingly endless COVID-19 pandemic, gold has seen a record bull run throughout the remaining 2020, reaching its own high record of $2,000 per ounce for the first time ever in August, past the previous price record in August 2011.

The uncertainty of the pandemic had made many people started to panic and began raiding gold assets.

According to the World Gold Council, exchange-traded funds that track gold have shown a record net inflow of around $50 billion. Even the legendary investor Warren Buffett had decided to acquire a $564 million stake in the second-largest gold-mining company in the world, Barrick Gold Corporation. Keep in mind that this is the same Buffett who expressed that gold "gets dug out of the ground" and "has no utility" back in 1998.

Moreover, the pandemic impacted the limited gold supply, making it seem scarcer for a while and thus, rising up the price. The total annual gold supply was lower than usual because of several pandemic-related disruptions such as lockdowns and mine closures. As a result, there was a considerable drop in production.

Meanwhile, it is also worth noting that there was a hard decline in demand, especially from the jewelry industry. Near the end of the year, the gold price started to steadily consolidate from its record high in August, following the US election and the successful development of Covid vaccines.

How the US Dollar Got Its Main Role

The US used to have a semi-peripheral economy, disconnected from the rest of the world for the most part. However, it all changed after the end of World War II as a new economic world order was established.

At Bretton Woods, the US was made a central position in the emerging international order. The accord established a "gold exchange standard" after the "gold standard" had collapsed in 1919.

The Bretton Woods system basically had two rules. First, the price of gold had to be fixed in terms of the dollar, which was convertible into gold. Second, each country had to maintain a "parity" in terms of the dollar. Since then, the US dollar became so important in the global monetary system.

However, under Richard Nixon's "New Economic Policy" in 1974, the US forfeited the Bretton Woods system. Yet, the dollar survived the movement and maintained its role as the cornerstone of international finance. With the number of currencies keeps growing with various stability from time to time, the dollar remains a safe haven for investors.

US Dollar during the COVID-19 Pandemic

During the uncertainty of the COVID-19 pandemic in March 2020, risk-averse investors initially flocked to forex and the US dollar. The US Fed decided to cut interest rates to zero in April, which only meant there were more reasons to carry trades and fund with US Dollars.

Even as the virus spread rather quickly through the US, investors were still filling the market and thus supporting the US Dollar to maintain its safe-haven status.

But even so, the currency did experience major swings in April and May following lockdowns across the world due to the pandemic. The US Dollar saw more volatility than usual during this time.

The price eventually weakened as lockdowns were eased and various political events in the US led to a resurgence of cases in June and September. 

It didn't take long until the greenback dipped to a 27-month low in August 2020. The dollar index suddenly dropped to a dismal 92.477. Many experts correlated the decline with the political uncertainties in the country as well as to the ongoing stimulus stalemate.

Another contributing factor to the dollar tumble was faster recoveries in the EU and Asian countries. They were able to handle the spread of COVID-19 more effectively than the US, which helped the asset values in these countries to rise.

In addition, considering the current state of the US government at that moment, many experts believe that the US dollar is most likely to remain weak over the next few years.

Luckily, despite the drawbacks in the second half of 2020, the US Dollar didn't lose its safe-haven status completely for the following reasons:

• The US Dollar doesn't tend to be as volatile as other emerging market currencies in the first place.
• Global central banks played their parts by reserving US dollars.
• It's also the most used currency for global transactions.

As of December 2020, there is more than $1.8 trillion in circulation across the world.

So, Which One Is Better?

In conclusion, gold and US dollars have been great safe havens for many years now. Both assets are considered reliable and able to hedge risks, especially during market turbulence and crisis.  As we can see from the explanation above, during uncertain times like the COVID-19 pandemic, gold, and the US dollar were still able to prove their longstanding positions as safe-haven assets.

As investors allocate their portfolios towards gold and US dollar as means to safeguard their wealth. In other words, both will always have a place in the greater financial sector and stays relevant during unpredictable times.

When it comes to the question of which one is better than the other, we must understand that both are essentially strong. But one thing about these assets that we can observe is that gold is priced in US dollars and tend to move in the opposite direction of the greenback. The reason is that a stronger dollar means that it would take fewer of them to buy an ounce of gold.

As the US dollar is expected to remain subdued in the coming years, gold is more likely to gain greater importance as a safe haven. While both have been great reliable assets, the circumstances in the financial markets also play a part in determining which one is winning.