One of the topics that has received attention in microfinance research is the discussion of what constitutes a safe asset and whether it is in short supply.
During a crisis, there is an increased demand for safe assets that are information-insensitive and serve as a means to protect wealth. A simple example of a safe asset is the US Treasury bill. When there is high uncertainty, investors tend to sell risky assets and shift to safer ones. However, if there is a shortage of these safe assets, the price will be bid up, placing downward pressure on interest rates.
Nevertheless, there is the assumption that the supposed safe asset will really be safe. That is, the risk or market uncertainty cannot come from the producer of the safe asset. If there is an increase in risk from the safe asset, it will lose its convenience yield, and it will no longer be uncorrelated with risky assets.
In this case, there will be a demand for alternative safe assets. One alternative is gold. Gold is often uncorrelated with risky assets during times of stress. It is negatively correlated with volatility and uncertainty, and it often protects against higher inflation that impacts the real value of debt-safe assets. It is information-insensitive, and it can be used as collateral.
Many have suggested that gold is in a bubble, but that narrative shifts if you view gold as a safe asset substitute. If the US debt is less secure, then there will be a stronger demand for gold, which will push its value higher. If the relative safety shifts to gold and away from debt, then there will be stronger upward pressure on gold. The price increase has been significant, but it will be sustained if the safety feature continues to drive demand.
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