Safe Haven Assets: Trading on Gold, Currencies & Bonds

Safe haven currencies belong to countries that investors perceive as the strongest or least likely to pose risk when there is economic stress, examples being the US, Japan and Switzerland. However, not all currencies are considered safe havens just because they are strong in value; see our guide to the 16 strongest currencies in the world for more information. Given that the US is the world’s strongest economy​, it doesn’t come as a surprise that the US dollar (USD) is a safe haven currency. The USD is the world’s global reserve currency; therefore, it’s used for many business deals across the world and isn’t normally negatively impacted by domestic or international uncertainties. Traders may open a long position on currency pairs using USD as the base or quote currency, such as our CMC USD Index​, a forex basket composed of pairs with USD as the base. The yen earned its reputation as a safe-haven due to Japan’s high trade surplus versus its debt.

However, our supplementary analysis reveals that traditional assets, such as gold and Bitcoin, are still strong safe havens in periods with an extreme market downturn. To determine the results of safe-haven assets during the 2008 GFC and COVID-19 periods, we jointly estimate Eqs. Our results further indicate that silver and the Islamic stock index are strong safe havens against the US stock market during the 2008 GFC period, but gold and T-bonds are weak safe havens. Conversely, during the COVID-19 period, the Islamic stock index and Tether are strong safe havens, whereas Sukuk and Swiss francs are weak safe havens. Surprisingly, Bitcoin, GSCI, and crude oil prices perform as neither a hedge nor a safe haven for the US stock market. Among our selected assets, only the Islamic stock index has consistent safe-haven properties, as it serves as a strong safe haven in both crises.

It protects your portfolio from losses

Treasure bills (T-bills) are debt securities that are backed by the full faith and credit of the U.S. government and, hence, are considered safe havens even in tumultuous economic climates. T-bills are also seen as risk-free, as any principal invested is repaid by the government when the bill matures. Investors, therefore, tend to run to these securities during times of perceived economic chaos.

The thinking here is that no matter the state of the markets, people will still need to access electricity, gas, and power. People will still be purchasing staple items like food (and toilet paper, as we’ve learned during the Covid market crisis!). As seen in the chart below, all three defensive sectors outperformed the global equity market on a relative basis. Cryptocurrencies comprise less than 0.7% of the world’s investments, although they attract a disproportionate amount of attention from traditional and social media. The largest cryptocurrency, Bitcoin, is even labelled as the ‘new gold’ by some media outlets.

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3 Gold also entered positive territory in the period immediately following the COVID market crisis, returning +6.52% from March 24, 2020 through May 6, 2020. Practise taking a position on the price of defensive stocks with an IG demo account. The country’s independence from the EU has also made it a popular haven for capital during negative political and economic circumstances. In fact, during the eurozone crisis, so much money https://trading-market.org/ was flowing into the franc that the Swiss central bank introduced a temporary currency peg against the euro to try and weaken their domestic currency. Market downturns are an inevitable part of market cycles, which means that it is in an investor’s best interest to prepare themselves for them as much as possible. Certain financial information included in Dividend.com is proprietary to Mergent, Inc. («Mergent») Copyright © 2014.

No representation or warranty is given as to the accuracy or completeness of this information. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. Investors looking to manage their risk during economic downturns could also choose to turn to defensive stocks, because they tend to perform better than the wider stock market during recessions. Perhaps the strongest example of gold as a safe-haven was following the 2008 global financial crisis.

Understanding the Enigmatic Nature of Safe Haven Assets

Defensive stocks describe the shares of companies that are involved in providing goods and services such as utilities, consumer staples, food and beverages, and healthcare. They are considered safe-haven assets because they are likely to remain stable due to the constant demand for their products, even in periods of economic instability. Also, when there is a threat of inflation, the value of gold increases since it is priced in U.S. dollars. Other commodities, such as silver, copper, sugar, corn, and livestock, are negatively correlated with stocks and bonds and can also serve as safe havens for investors. The assets co-move with the stock market provided that all the parameters (c

0, c

1, and c

2) are positive, implying that the assets do not satisfy the hedge and safe haven criteria. Parameter c

0 estimates the hedging characteristics of all assets on average.

During times of market turmoil, investors turn to gold given its perceived safe haven status. As Russian troops invaded Ukraine on 24 February, the yellow metal reached $1,974/oz, https://bigbostrade.com/ the highest it’s been since September 2020. The limitation of this study is that we focus only on the US market, though it is the world’s largest market.

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They can provide a stable foundation for your investment portfolio, ensuring long-term financial security and peace of mind. Because utilities provide essential services, their demand remains relatively inelastic even during economic downturns. This characteristic makes utility stocks attractive for investors seeking income-generating investments with a lower risk profile. By carefully selecting utility stocks with solid fundamentals and a history of reliable dividends, an investor can weather the storms of economic uncertainty and reap the benefits of consistent income. Utility stocks, representing companies providing essential services such as electricity, water, and gas, are another category of conservative, safe haven assets worth considering. These companies tend to operate in regulated markets, ensuring a relatively stable stream of revenue and, consequently, consistent dividend payouts for investors.

62% of CMC client accounts with open positions on USD/CHF expect the price to rise. 58% of CMC client accounts with open positions on EUR/USD expect the price to rise. 88% of CMC client accounts with open positions on Platinum – Cash expect the price to rise. 91% of CMC client accounts with open positions on Silver – Cash expect the price to rise. 87% of CMC client accounts with open positions on Palladium – Cash expect the price to rise. 81% of CMC client accounts with open positions on Gold – Cash expect the price to rise.

While assets like gold and bonds are easily understood to be safe havens, currencies are not typically thought of as such. However, some currencies like the US dollar (USD) or the Swiss franc (CHF) are considered to be safe havens thanks in large part https://forexhistory.info/ to the strength of the nations’ economies and their robust banking systems. When financial markets are in crisis like they were during the Global Financial Crisis of 2008, investors tend to flock to assets that they consider safe and high quality.

Since hedging, diversification and contagious characteristics of alternative assets exist across time, it may be useful to empirically investigate their potential safe haven behavior across different turmoil periods. Our empirical findings reveal that, during the 2008 GFC, only silver and the Islamic stock index perform as strong safe havens for the US stock market, but during COVID-19, the Islamic stock index and Tether perform as strong safe havens. Surprisingly, only the Islamic stock index provides a consistent safe haven. However, among the selected assets, only gold and the US dollar are strong hedges during the full sample period.

• Therefore, it’s used for many business deals globally and isn’t normally negatively impacted by domestic or international uncertainties.
• Cash, especially the U.S. dollar, is one of the safest assets if held at an FDIC-insured bank.
• In this way, it did act as a “successful” safe haven, however, there is more worth noting.
• 61% of CMC client accounts with open positions on USD/JPY expect the price to rise.

99% of CMC client accounts with open positions on Pfizer expect the price to rise. 79% of CMC client accounts with open positions on CMC USD Index expect the price to rise. 61% of CMC client accounts with open positions on USD/JPY expect the price to rise.

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These assets include gold, bonds, certain stocks, and even cash, which are considered to have lower risk. In this article we’ll further get into what safe haven assets are and discuss examples and tips on how to approach this type of investment. As for gold serving as a safe haven, meaning it is stable during bear markets in stocks, Erb and Harvey found gold isn’t quite the safe haven, some might think. As it turned out, 17 percent of monthly stock returns fell into the category where gold dropped while stocks posted negative returns. If gold acts as a true safe haven, we would expect very few, if any, such observations.

Almost all sectors and assets are negatively affected by the economic crisis, hence, in such periods, diversification or hedging strategies often fail to protect investors’ portfolios from plummeting. Therefore, in an extreme economic crisis, investors usually search for assets that have safe-haven properties. For example, during the 1987 stock market crash, investment shifted from risky to safe assets (Caballero & Krishnamurthy, 2008).