Safe haven asset

When banks wobble or a currency loses its value, people look for something that will still be worth something tomorrow. That is what a safe haven asset means.

Chapter 1 gives the title to gold: it has been considered by many as a safe haven asset. In case of failure of an economy, or a currency, gold is considered to be the final shelter. The Chapter 1 sample question — "_____ is a safe haven asset class" — has gold as its answer, over debt, equity and real estate.

The workbook is careful to add that the opposite camp also comes with very strong arguments. Safe haven is a reputation, not a guarantee.

The reasoning in Chapter 1.2.2 has four parts.

History. Gold and silver have been used as investments or stores of value for a very long time, and the history of currency would be incomplete without them.

Central banks. Many currencies were once pegged to the gold reserves of the country's central bank. That gold standard was done away with a few decades ago — and still most central banks hold gold in their reserves.

A global price. Gold prices are almost in sync across the world once adjusted for the exchange rate and local costs and restrictions, so gold is a globally accepted asset.

The costs of the shelter. Gold pays no current income — the return is capital appreciation or nothing. And for most investors it is almost impossible to judge purity: a purity certificate raises the cost, while buying without one risks lower-quality metal.

Gold is also available in financial form. Table 1.1 puts gold funds under commodities, and Chapter 2 allows Gold ETFs as a residual investment in hybrid schemes and as an asset in life cycle funds.

Tax follows the form. Chapter 8's table taxes Gold ETFs at the marginal slab rate for short-term gains and 12.50 percent for long-term gains, with LTCG applicable after 12 months.

Kavita in Jaipur puts Rs 5,00,000 into a Gold ETF as a hedge against a crisis. All figures are illustrative.

Year one, no crisis. Gold prices barely move. A bank FD of the same amount at 7 percent would have paid Rs 35,000 of interest. Her ETF paid nothing, because gold has no current income — the price of the shelter.

Month fourteen, markets fall sharply. Gold rises and her holding is worth Rs 5,60,000. She sells.

Gain                         = 5,60,000 − 5,00,000 = Rs 60,000
Holding period               = 14 months (> 12 months) → long-term
Tax at 12.50%                = Rs 7,500

Had she bought jewellery or coins instead, she would have faced the purity question on the way in and again on the way out — and a buyer who may not pay full value for metal whose purity is uncertain.

Chapter 1.2.2 (Commodities) is the only place the term is taught, and it is asked directly in the Chapter 1 sample questions (gold). Tie it to the asset-class facts around it: commodities give no current income, gold and silver are globally accepted, real assets exist in physical and financial form, and Chapter 8 taxes Gold ETFs at MSR for short-term gains and 12.50 percent after 12 months.

• The safe haven asset is gold — not debt. Debt is the safer asset class in normal times; the safe haven question is about the failure of an economy or currency.
• "Safe haven" is not "risk-free". The workbook says outright that the opposite camp has very strong arguments.
• The gold standard ended decades ago, yet central banks still hold gold — both halves are in the text.
• Gold earns no current income. All return is price appreciation.
• Commodity derivatives are not treated as investments in Chapter 1: they are leveraged and short-term.