‘Assets as a safe haven (safe-haven asset)’.

Looking at the English expression makes the meaning of the term ‘safe asset’ clearer. In English, it refers to an asset like a harbor where one can take shelter for a while from a market storm (volatility). Traditionally, gold and U.S. Treasuries have played the role of safe assets.

The formula for ‘safe assets’ is being shaken by the U.S.Iran war. Prices of gold and U.S. Treasuries, the representative safe assets, have fallen. Gold dropped 17% over March alone, marking the largest monthly decline since 1983. U.S. Treasury prices also fell. As flagship safe assets wobbled, investors have turned their eyes to new ‘refuges’ such as crypto assets, the dollar, or even cash.

First, the plunge in gold prices is analyzed as reflecting expectations that central banks will raise interest rates as international oil prices surge and inflation fears grow. Because gold does not pay interest, its investment appeal declines when expectations for higher rates increase.

On top of that, a bubble that had built up before the war delivered the final blow. Last year, gold prices surged 65%, approaching 5,600 dollars per ounce in January. As market volatility increased due to the war, some interpret that investors dumped gold, which had ‘risen as much as it could’, to cover losses elsewhere. The investment outlet Investors Chronicle speculated, “In particular, Gulf countries tend to use considerable leverage based on ‘oil money’,” adding, “When the Strait of Hormuz was blocked, they likely sold large amounts of gold to raise funds.”

This directly translated into losses for gold investors. Over the past month (as of the 6th), returns for ‘ACE KRX Gold Spot’ and ‘TIGER KRX Gold Spot’, which track physical gold on the Korea Exchange gold market, fell by 7.17% and 7.32%, respectively. ‘KODEX Gold Futures’, which tracks a gold futures index, declined 10.2%.

U.S. Treasuries also wobbled. The 10-year U.S. Treasury yield, which was 3.95% the day before the U.S. airstrikes on Iran, rose by nearly 0.5 percentage points in a month. That means Treasury prices fell. Concerns about increased issuance to finance war costs have worsened supply-demand dynamics. Traditional safe assets are not fulfilling their roles.

So what could be the ‘new safe asset’? Some point to ‘digital gold’, namely crypto assets. February 28, when the United States first launched airstrikes on Iran, was a Saturday. The only market open then was the crypto market. Bitcoin initially plunged 8.5% that day but later rebounded and rose more than gold and the U.S. S&P500. This is why many say Bitcoin has withstood the Iran crisis far better than gold and silver. There is also analysis that part of Middle Eastern oil money is moving into coins along with dollar assets.

However, given its nature as a highly liquid, 24-hour traded asset, there is significant counterargument that Bitcoin is the first to be sold off when a crisis erupts and thus it is premature to classify it as a safe asset.

Funds exiting gold and other assets are flowing into the ‘dollar’. The dollar index (DXY), which measures the dollar against major currencies, had hovered below 100 since the end of last year but on the 13th, two weeks after war broke out, it broke through the psychologically important 100 level. Gold and the U.S. dollar traditionally have an inverse relationship, and this war has made that especially clear. Thanks to the status of the United States as a net energy exporter, the surge in oil prices has actually supported dollar strength.

Kim Kwang-seok, head of economic research at the Korea Economic Industry Research Institute, said, “This does not mean gold is not a safe asset, but after the Middle East war escalated, the dollar’s status as a safe asset has strengthened,” adding, “A considerable share of (Gulf) oil money is also showing a tendency to move into coins or dollar assets.”

Demand for cash is also showing strongly. According to the Korea Financial Investment Association, as of the 2nd, domestic money market fund (MMF) assets under management totaled 245.6335 trillion won. MMFs invest in short-maturity, highly stable assets such as government bonds, commercial paper (CP), and short-term bonds. They serve as ‘parking’ for funds when market uncertainty increases. As of that day, ‘KODEX Money Market Active’ saw a net inflow of 524.4 billion won over the past month, ranking fourth after ‘TIGER Semiconductor TOP10’, ‘KoAct KOSDAQ Active’, and ‘KODEX 200’.

Experts interpret this as a classic case of ‘risk aversion, cash preference’. With stock market volatility rising due to the war and confidence in safe assets such as gold and Treasuries weakening, money is first flocking to parking vehicles.

That does not mean gold has entirely lost its status as a safe asset. After retreating to around 4,000 dollars per ounce last month, gold rebounded and, as of the 6th, was trading near 4,600 dollars. As expectations grow for a prolonged Middle East war, preference for safe assets appears to be recovering. The International Finance Center stated, “Gold’s intrinsic value as a safe asset has not been damaged, and there is room for a rebound depending on the paths of the dollar and interest rates going forward.”

Hwang Byung-jin, a researcher at NH Investment & Securities, said on the 7th, “With attention on the possibility of Middle East tensions easing within 2 to 3 weeks, bargain hunting is flowing into the industrial metals and precious metals sectors (including gold) that were damaged during March,” adding, “Although there is short-term downside pressure around gold prices, this could be a buying opportunity for long-term investors.”