tag:theconversation.com,2011:/id/topics/safe-havens-4035/articlessafe havens – The Conversation2020-03-13T15:50:18Ztag:theconversation.com,2011:article/1336422020-03-13T15:50:18Z2020-03-13T15:50:18ZWhy Japanese yen is still one of the safest places to park your money in a market crash<figure><img src="https://images.theconversation.com/files/320467/original/file-20200313-115127-1e53f5t.jpg?ixlib=rb-1.1.0&rect=0%2C11%2C3460%2C2144&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Y, as in "yes please".</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/japanese-yen-jpy-symbol-made-golden-738166672">Novikov Aleksey/Shutterstock</a></span></figcaption></figure><p>Fear is contagious – not least in financial markets. When it turns to panic, it spreads fast in today’s interconnected and technologically advanced trading world. Assets that are associated with some kind of risk fall in value – witness the plunges of 25% that <a href="https://www.bbc.co.uk/news/business/market-data">we have seen</a> in global stock markets since coronavirus fears took hold. </p>
<p>When panic moves across the world like this, there are only a few places to take shelter. These are referred to as “safe havens”. Because traders and investors know to seek refuge in these places, they can quickly become very crowded. The increased demand therefore often sends their values soaring. </p>
<p>The list of safe-haven assets is short and tends to include precious metals, bonds issued by countries seen as least likely to default, and the currencies in which those bonds are denominated. </p>
<p>The Japanese yen has been a favourite in recent times. The Swiss franc is another, with Switzerland’s long history of low inflation and political financial stability. But the yen has the added attraction of being more liquid, meaning it is more readily available to trade. </p>
<p>German government bonds are very popular, too, but Japan’s economy is larger. Germany also doesn’t have its own currency, and the eurozone crisis revealed that the euro still has some way to go before it can be classified as a genuine safe haven. </p>
<p>This leaves the US dollar. The greenback remains the undisputed global reserve currency. It is also the currency denomination of US treasury bills, which are by far the most frequently used example of a “risk-free” asset in academic textbooks. </p>
<p>Yet it makes more sense to observe what traders and investors <a href="https://www.researchgate.net/publication/330380315_Terror_Attacks_Foreign_Exchange_Markets_and_Class_Dynamics">actually do</a> in a crisis. In the aftermath of the 9/11 attacks in 2001, the Madrid train bombings of 2004, the Lehman collapse in 2008, the eurozone crisis in 2010 and the Brussels bombings in 2016 – to name only a few examples – traders and investors bought Japanese yen over most other currencies, including the US dollar. </p>
<h2>Yen strength unpacked</h2>
<p>Japan has not always been a safe haven. The <a href="https://www.bis.org/publ/bppdf/bispap06.htm">Japanese banking crisis</a> during the late 1990s involved not only a credit crunch and a stock market collapse, but also a much weaker yen. Back then, financial traders treated Japan more or less like a “normal” country. After the crisis, the perception gradually changed. It is difficult to pinpoint the exact causes, but three factors seem relevant. </p>
<p>First, in response to the banking crisis, the Japanese government introduced a string of policy measures, such as bank capital injections and new laws giving the authorities better tools to deal with bank failures. Painful lessons were learned, and in contrast to the US and Europe, Japan entered the financial crisis of 2007-09 with a relatively stable banking system. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/320449/original/file-20200313-115138-1yn05ou.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/320449/original/file-20200313-115138-1yn05ou.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/320449/original/file-20200313-115138-1yn05ou.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=438&fit=crop&dpr=1 600w, https://images.theconversation.com/files/320449/original/file-20200313-115138-1yn05ou.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=438&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/320449/original/file-20200313-115138-1yn05ou.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=438&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/320449/original/file-20200313-115138-1yn05ou.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=550&fit=crop&dpr=1 754w, https://images.theconversation.com/files/320449/original/file-20200313-115138-1yn05ou.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=550&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/320449/original/file-20200313-115138-1yn05ou.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=550&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Still got it.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/line-men-holding-japanese-flags-on-22893922">Stephen Finn</a></span>
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<p>Second, Japan has <a href="https://www.reuters.com/article/us-japan-economy-assets/japan-keeps-top-creditor-nation-status-as-external-assets-grow-idUSKCN1SU01J">held the position</a> as the world’s top creditor nation for nearly three decades, heavily buying the likes of bonds issued by other governments. When panic hits the markets, many of these bonds will be offloaded and converted back into yen, driving up demand for the currency as it returns “back home”. Peculiarly, this even applies to panics originating in Japan. When the devastating <a href="https://www.livescience.com/39110-japan-2011-earthquake-tsunami-facts.html">Tōhoku earthquake and tsunami</a> struck in 2011, for instance, it resulted in a stronger, not weaker, yen. </p>
<p>Finally, the Bank of Japan was a pioneer in launching unconventional monetary policies like <a href="https://theconversation.com/quantitative-easing-now-looks-permanent-and-has-turned-central-banks-into-pseudo-governments-130098">quantitative easing</a> and <a href="https://theconversation.com/negative-interest-rates-will-not-fix-the-global-economy-just-ask-switzerland-130718">near-zero interest rates</a> to revive the economy. This enables investors to engage in so-called “carry trades”, whereby they borrow in Japan, taking advantage of the low-interest-rate environment, and lend or invest in countries where the returns are higher, such as Australia. During a panic, some carry trades are unwound. The outcome: money flows back to Japan, and the yen strengthens further.</p>
<h2>Still safe?</h2>
<p>Despite all this, <a href="https://www.etfstream.com/feature/6480_is-the-yen-still-a-safe-haven/">an increasing</a> number of observers have been <a href="https://www.ft.com/content/23d721cc-3609-11ea-a6d3-9a26f8c3cba4">questioning</a> whether Japan still deserves its safe-haven status. Near-zero interest rates have almost become the new norm in developed countries, so the relative attractiveness of the Japanese yen is less evident. Japanese banks <a href="https://www.reuters.com/article/us-softbank-group-wework/softbanks-3-billion-wework-financing-talks-stall-with-japan-banks-sources-idUSKBN1YR0N0">have also</a> become <a href="https://asianbankingandfinance.net/lending-credit/news/japanese-regional-banks-assume-more-risk-boost-bottomline">more risk-seeking</a>, particularly abroad, <a href="https://www.ft.com/content/5f9631d4-f636-11e9-9ef3-eca8fc8f2d65">whereas their</a> European and American peers have attempted to make boring banking exciting again. </p>
<p>The Japanese financial system is comparatively more fragile than a decade ago. Japan has an <a href="https://worldpopulationreview.com/countries/countries-by-national-debt/">extraordinarily high debt-to-GDP ratio</a>, an <a href="https://forextv.com/forex-analysis/japan-gdp-revised-down-to-7-1-in-q4/">economy that shrank</a> 7.1% on an annualised basis in the fourth quarter of last year, an <a href="https://www.japantimes.co.jp/opinion/2019/01/10/editorials/face-challenges-shrinking-aging-population/">ageing population</a>, and is geographically and economically close to China. This proximity makes Japan particularly sensitive to fluctuations in <a href="https://www.bbc.com/news/business-45899310">US-China trade relations</a> and, of course, the spread of the coronavirus. Indeed, as the <a href="https://www.theguardian.com/global-development/2020/mar/06/inside-the-cruise-ship-that-became-a-coronavirus-breeding-ground-diamond-princess">Diamond Princess</a> found itself docked outside Yokohama with 2,600 people in quaratine, the appeal of the Japanese yen looked very questionable.</p>
<p><strong>Top 10 most indebted countries</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/320418/original/file-20200313-115106-11c6kg1.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/320418/original/file-20200313-115106-11c6kg1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/320418/original/file-20200313-115106-11c6kg1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=289&fit=crop&dpr=1 600w, https://images.theconversation.com/files/320418/original/file-20200313-115106-11c6kg1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=289&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/320418/original/file-20200313-115106-11c6kg1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=289&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/320418/original/file-20200313-115106-11c6kg1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=364&fit=crop&dpr=1 754w, https://images.theconversation.com/files/320418/original/file-20200313-115106-11c6kg1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=364&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/320418/original/file-20200313-115106-11c6kg1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=364&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://worldpopulationreview.com/countries/countries-by-national-debt/">World Population Review</a></span>
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</figure>
<p>But fear is not the same as panic. With Italy having placed 16 million people under quarantine and Saudi Arabia launching an aggressive oil price war, the real test took place on Monday March 9. Neither fear nor panic are enough to describe how the financial markets opened that day. Newspapers would describe it as a “<a href="https://www.cnbc.com/2020/03/08/dow-futures-drop-700-points-as-all-out-oil-price-war-adds-to-coronavirus-stress.html">bloodbath</a>” or “<a href="https://www.smh.com.au/business/markets/armageddon-situation-what-analysts-are-saying-about-the-market-meltdown-20200309-p5488t.html">Armageddon</a>”. In the midst of this, the Japanese yen hit multi-year and even all-time-highs against a range of currencies. On the next huge market sell-off on Thursday 12, the yen was again in very high demand. </p>
<p><strong>Japanese yen vs British pound</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/320425/original/file-20200313-115138-3yfqzm.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/320425/original/file-20200313-115138-3yfqzm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/320425/original/file-20200313-115138-3yfqzm.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=362&fit=crop&dpr=1 600w, https://images.theconversation.com/files/320425/original/file-20200313-115138-3yfqzm.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=362&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/320425/original/file-20200313-115138-3yfqzm.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=362&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/320425/original/file-20200313-115138-3yfqzm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=455&fit=crop&dpr=1 754w, https://images.theconversation.com/files/320425/original/file-20200313-115138-3yfqzm.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=455&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/320425/original/file-20200313-115138-3yfqzm.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=455&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.macrotrends.net/2556/pound-japanese-yen-exchange-rate-historical-chart">MacroTrends</a></span>
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<p><strong>Japanese yen vs US dollar</strong></p>
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<a href="https://images.theconversation.com/files/320426/original/file-20200313-115101-4iuven.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/320426/original/file-20200313-115101-4iuven.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/320426/original/file-20200313-115101-4iuven.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=362&fit=crop&dpr=1 600w, https://images.theconversation.com/files/320426/original/file-20200313-115101-4iuven.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=362&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/320426/original/file-20200313-115101-4iuven.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=362&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/320426/original/file-20200313-115101-4iuven.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=455&fit=crop&dpr=1 754w, https://images.theconversation.com/files/320426/original/file-20200313-115101-4iuven.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=455&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/320426/original/file-20200313-115101-4iuven.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=455&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.macrotrends.net/2556/pound-japanese-yen-exchange-rate-historical-chart">MacroTrends</a></span>
</figcaption>
</figure>
<p>Sceptics may still argue that the process of losing safe-haven status can be gradual. But this misses the whole point. A safe haven is not a theoretical construct, but the place where traders and investors seek shelter in practice when all options have been explored – including all the half-way houses. Judging by the events during the market crash of March 2020, the Japanese yen is still the safe-haven currency par excellence.</p><img src="https://counter.theconversation.com/content/133642/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexis Stenfors is the author of Barometer of Fear: An Insider’s Account of Rogue Trading and the Greatest Banking Scandal in History.</span></em></p>As the sun sets on world markets, rumours of the death of investors’ favourite safe haven have been much exaggerated.Alexis Stenfors, Senior Lecturer in Economics and Finance, University of PortsmouthLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/991342018-07-12T03:19:38Z2018-07-12T03:19:38ZThink carefully before buying Bitcoin – and don’t buy the ‘safe haven’ claims<p>The sharp rise and subsequent fall in Bitcoin’s value places it among the greatest market bubbles in history. It has outpaced the 17th-century tulip mania, the South Sea bubble of 1720, and the more recent Japanese asset price and dot-com bubbles. </p>
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<p>The rapid price rise garnered attention from an increasing number of academics and investment advisers. Some have suggested that Bitcoin improves portfolio performance and can even be used as a potential “safe haven” asset in <a href="https://www.sciencedirect.com/science/article/pii/S0378426609003343">place of gold</a>. </p>
<p>Our work finds that much of this research is <a href="https://www.sciencedirect.com/science/article/abs/pii/S1544612317305093">flawed</a> and overlooks some <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3204237">important attributes</a> that any investor should consider before allocating funds to such a speculative investment. </p>
<p>This is particularly relevant if investing in Bitcoin is rationalised as a prospective <a href="https://theconversation.com/explainer-what-are-safe-haven-investments-9146">safe haven</a> in times of market turmoil.</p>
<h2>Hard to value</h2>
<p>The first attribute investors consider is how to value Bitcoin. Typically, assets are valued based on the cash flows they produce. Bitcoin lacks this property. </p>
<p>This leads to ongoing debate as to the true value of Bitcoin and other cryptocurrencies. Some, such as the Winklevoss twins and other <a href="http://time.com/money/5002207/richest-people-with-bitcoin/">Bitcoin entrepreneurs</a>, believe the price will soar far higher. Others, including Nobel prize winner <a href="https://cointelegraph.com/news/nobel-prize-winner-eugene-fama-on-bitcoin">Eugene Fama</a> and esteemed investor Warren Buffett, believe the real value is closer to zero. Another Nobel winner, <a href="https://www.nytimes.com/2017/12/15/business/bitcoin-investing.html">Robert Shiller</a>, suggests the correct answer is “ambiguous”. </p>
<p>There is even wide variation in price across the various Bitcoin exchanges. This is common in fragmented markets and makes it difficult for an investor to find the best market price at any point in time – a process called price discovery.</p>
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<h2>High price volatility</h2>
<p>Bitcoin prices also have a high level of variation (volatility) when compared to other possible investments including bonds, stocks and gold. Even tech stocks such as Twitter, which are considered relatively volatile, are found to have less price variation. This adds to the difficulty investors face when trying to value Bitcoin and any portfolios that contain it. </p>
<p>This is of particular concern given the large daily losses that Bitcoin has experienced in its relatively short life. The largest one-day decline experienced by the popular S&P500 index since 2011 is 4.2%. Bitcoin has had nearly 200 days that were worse (and over 60 days worse than the biggest decline in the gold price of 10.2%).</p>
<p>Put another way, Bitcoin has had 200 days worse than the worst day on the stock market. This hardly seems like an enticing investment for most.</p>
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<h2>Low liquidity</h2>
<p>Investors should also consider the ease with which they are able to buy and sell any assets in which they invest. One method used to measure this liquidity attribute is the bid-ask spread – the difference in the price at which one is able to buy and sell the asset. </p>
<p>More liquid assets have a narrow bid-ask spread. Bitcoin’s bid-ask spread varies from one exchange to another, but in general it is much larger than for other assets.</p>
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<p>While bid-ask spreads provide one measure of implicit trading costs, investors also consider the explicit transaction fees they are charged when trading. Transaction fees for trading traditional investments are typically well known and have trended down over time. </p>
<p>While Bitcoin fees have recently declined, they have proven to be highly variable, ranging from over $30 to under $1. The time taken to process a transaction can also be greater than 78 minutes. This is much longer than for stocks or bonds and creates another layer of uncertainty for investors.</p>
<h2>Only for the most risk-loving</h2>
<p>Bitcoin is harder to value, more volatile, less liquid, and costlier to transact than other assets in normal market conditions. Potential investors should be wary and carefully consider whether such highly speculative assets are appropriate additions to any portfolio. </p>
<p>Given safe havens are typically in demand during financial crisis, when markets are more volatile and less liquid, it is highly unlikely that Bitcoin is even worth considering as a safe-haven asset.</p><img src="https://counter.theconversation.com/content/99134/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee Smales does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Bitcoin’s rise and fall to date already makes it one of the greatest market bubbles in history. In turbulent times, some have suggested it as a substitute for gold, but it lacks some vital attributes.Lee Smales, Associate Professor, Finance, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/842432017-10-20T13:28:11Z2017-10-20T13:28:11ZHow Islamic financial markets are a safe haven in conventional market crises<figure><img src="https://images.theconversation.com/files/190646/original/file-20171017-30406-1ttt9nl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> </figcaption></figure><p>Islamic finance is enjoying a surge in popularity, with <a href="http://www.ey.com/Publication/vwLUAssets/ey-world-islamic-banking-competitiveness-report-2016/$FILE/ey-world-islamic-banking-competitiveness-report-2016.pdf">14% annual growth</a> in recent years. And the interest in sharia-compliant stocks and bonds is growing across the non-Muslim as well as Muslim world. </p>
<p>My <a href="http://www.sciencedirect.com/science/article/pii/S0927538X17301579">recent research</a> shows that there is good reason for this growth. In fact, Islamic markets were not rocked by the 2007-08 financial as much as conventional markets and can be considered a new safe haven for investors.</p>
<p>The popularity of Islamic financial instruments among Muslims is not surprising. Islamic law prohibits any forms of interest (<em>riba</em>) or gambling (<em>qimar</em>). Transactions that lack transparency (<em>gharar</em>) are also banned. In finance, this means that the vast majority of assets and popular trading strategies (such as short-selling and speculation) are prohibited according to Islam. </p>
<p>To circumvent this problem Islamic banks issue sharia compliant bonds known as sukuk. Conventional bonds involve a contractual obligation to pay bondholders interest and principle on a certain date. When sukuk bonds are sold to investors the money is used to invest in an asset, of which the bondholders have partial ownership. Payments to sukuk bondholders them comes from whatever after-tax profit is made on the asset. When they reach maturity, the issuer is contractually obliged to buy the bond back at the value it was bought for.</p>
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<img alt="" src="https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The Quran prohibits interest and gambling.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
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<p>There are also sharia-compliant stocks, which must comply to risk-averse criteria such as a low debt to income ratio. Plus, the company should have limited engagement with activities that are considered sinful in Islam, such as alcohol and tobacco. So Islamic stocks are attractive for Muslim investors, but also for non-Muslim investors, since these assets can be seen as more ethical. </p>
<h2>Wider benefits</h2>
<p>There are two popular beliefs that attract non-Muslim investors to choose sharia compliant assets. First, Islamic financial instruments can offer higher profits than non-Islamic assets. For example, for borrowers, high demand for ethical assets increases the marketability of sukuk in comparison to conventional bonds. </p>
<p>Second is the idea that Islamic financial markets are decoupled from conventional markets. There is a belief that the markets move in opposite directions during crisis periods so when conventional markets decline, Islamic ones grow. So, Islamic markets offer an important way for investors to diversify their portfolios and protect themselves against downturns in conventional markets. </p>
<p>As a result, Islamic finance is often placed in the category of alternative finance, with good potential for risk reduction. Myself and colleagues in the US, Saudi Arabia and Tunisia decided to put this idea to the test. After all, Islamic bonds are, generally speaking, not much different from traditional bonds in terms of their structure. And Islamic stocks are often affected by the same global risk factors as conventional stock markets such as the crude oil price and the volatility index. </p>
<h2>A safe haven</h2>
<p>There have been a number of financial crises to rock stock markets over the years. The last two decades have seen the 1997 Asian financial crisis, 1998 Argentinian crisis, 2007-08 US and UK financial crisis to name a few. This causes significant volatility across markets, causing substantial loses for investors. They are therefore constantly searching for markets that are less influenced by crisis shocks.</p>
<p>In a <a href="http://www.sciencedirect.com/science/article/pii/S0927538X17301579">recent study</a> we compared Islamic indexes with their conventional counterparts during crisis periods in last two decades, across five regions: the US, UK, Canada, Japan, eurozone and the Asia-Pacific. We found that during turbulent periods the Islamic indexes decoupled from non-Islamic markets. </p>
<p>There was limited spillover of the crisis shock from conventional indexes to Islamic ones and so they did provide an opportunity for risk reduction. For example, with Canada’s Islamic and conventional indexes, during tranquil periods the volatility spillover from conventional to Islamic index reaches close to 40%. But after the 9/11 terrorist attacks the Canadian Islamic index receive just 10% of volatility. This reflects the fact that volatility levels are quite similar during tranquil periods, but there is a separation when turbulence hits conventional markets.</p>
<p>These results are also true for the global financial crisis and the eurozone debt crisis. The behaviour of the net volatility spillovers between Islamic and conventional markets shows that the Islamic indexes move against conventional indexes during the turbulent periods. </p>
<p>Shariah compliant assets will not save investors entirely from loses – it does not act as a cushion against all financial shocks that affect the conventional markets. And, in periods of economic stability, investors would not benefit much from investing in Islamic markets, as the correlation between Islamic and conventional markets is high during calm periods. But, nonetheless, Islamic markets have been less heated by global financial shocks and so can claim the status of a new safe haven, particularly from a non-Muslim investor’s perspective.</p><img src="https://counter.theconversation.com/content/84243/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Larisa Yarovaya does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Islamic markets were not rocked by the 2007-08 financial as much as conventional markets.Larisa Yarovaya, Lecturer in Accounting and Finance, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/533632016-02-07T19:06:25Z2016-02-07T19:06:25ZWhy gold will still be a safe haven in the next financial storm<figure><img src="https://images.theconversation.com/files/110286/original/image-20160204-3012-pg4ygn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Safe havens like gold are supposed to provide shelter in dire times.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>If you believe the financial media, safe-haven assets are constantly changing. </p>
<p>For example, following a period of volatile gold prices, the Wall Street Journal claimed last year that <a href="http://www.wsj.com/articles/golds-role-as-safe-haven-investment-wanes-1445250762">“Gold’s role as a safe-haven investment wanes”</a> and only three months later <a href="http://www.wsj.com/articles/gold-prices-rise-on-safe-haven-demand-1453724027">stated</a> that it had regained its safe-haven property.</p>
<p>Is gold indeed constantly changing its safe-haven status? The answer is a clear “no”. </p>
<p>The confusion may be due to a misunderstanding of what a safe haven really is. </p>
<p>A <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=952289">safe haven</a> is uncorrelated or negatively correlated with equity in extreme periods but not on average. So it is neither a safe asset nor a hedge in a traditional sense. In other words, a falling price of gold does not automatically imply that gold has lost its safe haven status. On the contrary, a falling price in tranquil periods is a necessity for gold to perform as a safe haven asset.</p>
<p>A financial safe haven, similar to the safety of a port, is supposed to provide shelter in a storm. A safe haven is not supposed to provide shelter or positive returns in tranquil times. This distinguishes a safe haven from a risk-free “safe” asset and a traditional hedge. It must perform in times of extreme turmoil but not at all times or over long periods of time. It must provide shelter at the beginning of a severe crisis or turmoil and as long as such shelter is needed. Empirically, it does so for about 10 days. </p>
<p>This short-lived property of gold as a safe haven is both essential and crucial. For example, the price of gold rose immediately after the September 11, 2001 terrorist attacks but became more volatile two weeks after the event. A similar effect was observed for days following the collapse of Lehman Brothers in mid-September 2008. Gold increased in value measured over a two-week period but started to lose value over the subsequent four weeks. </p>
<p>This effect, in contrast to a belief that appears to be widely held, is not evidence of a fading safe-haven property but quite the opposite. It is evidence of an effective and “healthy” safe haven effect. The safe haven is effective when it is needed the most as a shelter and subsequently loses value so that it can perform in the next storm. The price falls to make a future rise possible. The short-lived property of the safe-haven asset also implies that a comparison of the risk-return characteristics with other assets is misleading. </p>
<p>A safe-haven asset is supposed to provide shelter in periods of financial crisis or turmoil, in particular in response to extreme shocks. If it also reacted to small shocks, it could not be distinguished from a classical hedge. And if it outperformed equity over longer periods it would exhibit equity-like features and not be a safe haven.</p>
<p>Hence, a focus on shocks or crises that do not qualify as extreme or to use relatively long periods to assess a safe haven cannot prove that the safe-haven asset lost its safe haven status or that it never had such a status. </p>
<h2>Beyond gold</h2>
<p>There is another pitfall in assessing whether an asset is a safe haven. Gold is not the only safe-haven asset. The US dollar has been shown to increase in periods of crisis and so has the Swiss franc and <a href="http://rof.oxfordjournals.org/content/14/3/385.abstract">other currencies</a>. </p>
<p>Government bonds such as US Treasuries, UK Gilts or German Bunds, also appear to show safe-haven properties. While government bonds are also “safe assets” if held to maturity and assuming that there is no default, currencies play a very special role for gold in a safe-haven context. </p>
<p>If both gold and the US dollar increase at the same time in response to an extreme shock, the actual effect could be masked for gold. For example, if the US dollar appreciated by 5% and the value of gold increased by 5%, the price of gold in US dollars would appear to be stable. And if gold increased by only 4%, the price of gold in US dollars would even fall despite the fact that the value of gold changed consistent with its safe-haven status. While this effect may be disappointing for a US investor (or a Swiss investor), it can be highly rewarding for investors in other countries. For example, since the Australian dollar depreciated significantly during the global financial crisis and gold remained relatively stable, the value of gold in Australian dollars increased considerably showing a strong safe-haven effect for Australian investors.</p>
<p>To summarise, the evidence generally provided to claim that gold is not a safe haven asset is based on a lack of understanding of what a safe haven is, both theoretically and empirically. However, there is a possibility that gold or other safe haven assets eventually <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2142283">may lose their safe-haven status</a>. </p>
<p>If investors included safe-haven assets in their portfolios possibly mistaking them for a hedge, they would potentially inflate their prices in normal times and expose them to common shocks most likely depressing them in crisis times and thus depriving the assets of their safe haven potential. For gold, at current prices, it seems unlikely it is deprived of its safe-haven property.</p><img src="https://counter.theconversation.com/content/53363/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dirk Baur works for UWA.</span></em></p>Claims that gold is not a safe-haven asset are based on a lack of understanding of what a safe haven is.Dirk Baur, Professor of Finance, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/135152013-04-16T04:14:28Z2013-04-16T04:14:28ZA bear in there: the fading fortunes of the gold market<figure><img src="https://images.theconversation.com/files/22494/original/gssnqbhy-1366078811.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">As the price of gold continues to plunge, many investors are wondering whether the shiny commodity has lost its lustre.</span> <span class="attribution"><span class="source">Flickr\Bullion Vault</span></span></figcaption></figure><p>It has been a turbulent time for the gold market. The past two days of trading have been particularly volatile, with gold prices recording the sharpest two-day drop <a href="http://www.reuters.com/article/2013/04/15/us-markets-global-idUSBRE88901C20130415">in 30 years</a> .</p>
<p>The severity of the fall has led market commentators to suggest the gold price is now entering a <a href="http://www.abc.net.au/news/2013-04-15/gold-prices-slump-as-investment-banks-recommend-sell-off/4629072">bear market phase</a>, with further falls expected in the future. A key explanation is that the outlook for the world economy is improving, and so investors are pulling out of safe haven investments and looking for investments that yield better returns. Furthermore, the possibility of Cyprus selling some of its gold reserves could have exacerbated this effect. </p>
<p>Perhaps the most important question is whether gold prices will continue to fall. There have been three recent falls in gold prices over the period from 2011 to the present. Reference to recent <a href="http://www.lbma.org.uk/pages/index.cfm?page_id=53&title=gold_fixings">London PM gold fixings</a> provides some insight into the volatility of gold prices over the past two to three years. While gold prices rose rapidly prior to 2011, there were four peaks in the reported London gold price fixing. The spot price reached US$1895 on the 5th and 6th of September in 2011; US$1795 on the 8th of November that year; US$1781 on February 28 2012 and US$1791.75 on October 4 2012. Spot prices have consistently fallen, up until the last couple of days when the prices plunged to US$1395 on April 15.</p>
<p>The fall in the gold price will also affect the unit price of exchange traded funds (ETFs), which hold gold and derivative contracts that are written on gold. Gold ETFs tend to hold gold bullion or take positions in derivative contracts written on gold, so if investors are no longer interested in holding gold as an investment, they will sell the units in gold ETFs as well as physical gold. These direct trades, along with arbitrage trading, will tend to drive down the unit price of gold EFTs and gold derivatives until they reflect the fall in the underlying gold price.</p>
<p>But it is difficult to predict whether the price of gold will continue to fall. To some extent, the price of gold moves with crude oil and other commodities. For example, the correlation coefficient between the monthly rate of change in gold price and crude oil price is around 0.20. This is not particularly large, but it does suggest that there is some common movement from month to month. There is also some evidence of longer term links between these two commodities. The crude oil price has been trading around US$95 per barrel over the past couple of years and gold has been trading around US$1650 or so, except for recent months. While we often see graphs of gold prices rising or falling over selected periods it is very difficult to predict where prices will go from day to day. This tendency for prices to wander almost aimlessly over time is often referred to as a random walk, though the gold price movements of the last couple of days look more like considerable stumbles. Regardless, it is very difficult to know which way commodity prices will move over the next few months.</p>
<p><a href="http://online.wsj.com/article/SB10001424127887323346304578423431110506270.html">Recent news from China</a> suggests that there could be a slowing in the demand for commodities in the coming year. Perhaps commodity prices generally will fall with the expectation that demand will not be so good in the near future. This would exert downward pressure on the gold price. </p>
<p>Yet, while global consumer sentiment is increasing of late, as measured by the <a href="http://research.stlouisfed.org/fred2/series/UMCSENT/">University of Michigan Consumer Sentiment Index</a> and by the Conference Board Consumer Confidence Index, consumer confidence is still well below the levels achieved prior to the global financial crisis. This lack of global confidence will tend to support gold prices because of the safe haven that gold provides for investors. </p>
<p>Is gold still a safe haven commodity? Gold can still be easily bought and sold. It is difficult to destroy and can be stored relatively safely and at quite low cost. These safe haven characteristics of gold have not changed, and there is still much to be concerned about with European debt and political instability across the world. The problem for safe haven assets such as gold is that they do not generate income. If prices are falling, then the gold investor is making losses; gold investments have been generating losses for some months now. </p>
<p>With recent slowing in the Chinese economy, the fall in demand for commodities generally will tend to further depress prices of commodities such as gold. This poses a problem for investors, who see growing equity markets around the world. They have invested in a metal that is safely stored in a bank vault, which is currently generating losses with each fall in the gold price. At some stage, they must decide to cut their losses on gold and invest in more profitable alternatives. Perhaps the current dramatic falls in the gold prices reflects a change in investor expectations. </p>
<p><em>Since publication, this story has been revised to reflect the following correction: gold prices recorded their sharpest two-day drop in 30 years. This error was made by the editor.</em></p><img src="https://counter.theconversation.com/content/13515/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Heaney receives funding from the ARC.</span></em></p>It has been a turbulent time for the gold market. The past two days of trading have been particularly volatile, with gold prices recording the sharpest two-day drop in 30 years . The severity of the fall…Richard Heaney, Winthrop Professor, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/91462013-02-21T03:46:19Z2013-02-21T03:46:19ZExplainer: what are safe haven investments?<figure><img src="https://images.theconversation.com/files/14734/original/6bg7x6tc-1346211797.jpg?ixlib=rb-1.1.0&rect=7%2C143%2C980%2C778&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Gold and silver are traditionally considered "safe havens".</span> <span class="attribution"><span class="source">Image sourced from shutterstock.com</span></span></figcaption></figure><p>Safe haven investments are investments that provide a low level of risk during periods of extreme economic uncertainty. </p>
<p>The problem is that a safe haven investment is a safe haven investment until it is no longer a safe haven investment. </p>
<p>There are a number of assets that are often said to fall within this class and these include US government bonds, gold and silver, and land and property. Even if you identify such an investment the most important decision that you face is to decide when to invest in these assets?</p>
<p>US government bonds provide a classic example. In this case, US government bonds carry <a href="http://www.publicdebt.treas.gov/">the guarantee of the US government</a> with respect to coupon and principal payments, “backed by the full faith and credit of the U.S. government”. </p>
<p>Most governments issue bonds to investors but they are not all the same in terms of risk. For example, the Russian government defaulted on its bonds in 2000. Indeed, it is surprising just how many countries, including Australia during the 1930s, have defaulted on their debt over the last 200 years. The concern about European debt default is not unique to 2012. </p>
<p>While US Government bonds draw on the power of the US Government for their continued existence there are other safe haven type investments that draw upon their physical value. These include gold and silver, land and property and other physical assets that, in some sense, remain intact regardless of the surrounding economic turmoil.</p>
<p>Yet, can investment in silver or gold actually be labelled riskless? The gold price is currently high though there have been long periods of time when the gold price languished around USD 300.00 to USD 400.00 per ounce. To buy gold at USD1600.00 per ounce might seem a safe thing to do at present. However, this might not seem so safe if the price of gold were to suddenly fall to USD 300.00 per ounce as it did in the early 1980s. Similar movements have been observed in silver prices.</p>
<p>Many individual Australian investors believe that investment in land and property is riskless. But there now exists a growing body of disaffected Australian investors burned by the recent failure of a range of property investment vehicles due to the global financial crisis. </p>
<p>The timing of investment into safe havens is perhaps the most difficult decision. Should you wait until the equity market bottoms and then sell your shares and invest in the safe haven asset? This may seem reasonable at the time, but the problem with his action is that it crystalizes your losses. </p>
<p>In the wake of the global financial crisis equities could rebound, as they have after each of the recent financial crises over the last 30 years. While the equity market may not rebound to its earlier highs, waiting 12 months before moving your wealth to a safe haven could reduce the loss suffered as a result of the crisis. </p>
<p>But the market rebound poses its own question; is it really necessary to incur considerable transaction costs to invest in an asset class with little return (US government bonds) or with considerable risk (gold and property) now that things have settled a little? </p>
<p>Whether or not to move towards safe haven assets really comes down to your own investment portfolio decisions, and whether you believe in the value of diversification. If you are well-diversified it is likely that your investment portfolio already has exposure to so called safe haven investments. </p>
<p>Why would you decide to move from a well-diversified portfolio to a concentrated portfolio of safe haven assets just because of uncertain economic conditions? The whole reason for diversifying is to ride out both the certain and the uncertain times.</p><img src="https://counter.theconversation.com/content/9146/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Heaney has received funding from the ARC in the past though is not currently a chief investigator on an ARC project.</span></em></p>Safe haven investments are investments that provide a low level of risk during periods of extreme economic uncertainty. The problem is that a safe haven investment is a safe haven investment until it is…Richard Heaney, Winthrop Professor, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.