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Safe Haven Assets: Can the VIX Be a Substitute for Gold?


In short, no. Here's what investors need to know.

Then there's the S&P 500 Market Volatility Index (INDEXCBOE:VIX). The VIX is a financial instrument, which will quite likely do a good job in the case of small, day-to-day risks, but – unlike physical precious metals -- it will not protect you if the financial system is destroyed. It's not that we predict that to happen tomorrow or the next week, but something like that could very well take place eventually – within this decade or the next one.

The various decisions that the Powers That Be are making that limit the short-term risks (and the way the current financial system is designed) are actually increasing the systemic risk. In other words, all the insurance companies, reassurance companies, hedged risks via derivative instruments and so on, mean that unless the losses are really huge, the system will absorb it and move back to equilibrium. One company goes bankrupt? No problem. The system risk means a huge problem when a hundred companies go bankrupt at the same time which causes the companies that have been insuring them to go bust as well along with their reinsurers. At such time other companies would become vulnerable to default, which could spread given the overall panic in the market.

With the contagion effect, it wouldn't take long before the stock market tanked on hundreds and hundreds of companies going out of business. This is something that could collapse the financial system. That's precisely the systemic risk. In fact, systemic risk is just a fancy term for "when all hell breaks loose." Academics, and quite a few analysts, will tell you that systemic risk is here to stay and that you can't do anything about it. However, we respectfully disagree. There is something that has preserved value for thousands of years and endured more than tens of various fiat currency systems – precious metals.

The VIX, on the other hand, should seem excellent (as far as hedging the risk of plunging stocks is concerned) on a short-term and medium-term basis, but if the financial system collapsed, the VIX would likely not provide any protection whatsoever, as it's just a quite sophisticated part of this system.

Gold is not a mathematical computation of variability of stocks' returns, but an asset class of its own – one with a few thousand years of history of serving as a true hedge against the massive fiat money creation. Can a sophisticated financial instrument substitute gold as a true safe haven? No way.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
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