The phenomenon of Volatility on financial markets has been strongly felt by investors all of the times. The daily, quarterly and annual moves can be dramatically seen on their finance results. But, it is this volatility that also generates the market returns and creates opportunities for those who can anticipate and feel the market flow!
But when we face a long term volatility, like economic crisis or any other market turbulences, how do we protect our investments? What instruments can remain stable when everything around becomes undependable? Political, social or economical tensions between countries of the world, the globalisation process itself, have side effects on the financial world. No matter how sharp your investment strategy is, you can’t trust the market in those insecure times. Throughout this framework, safe haven assets can be a great solution!
An investment that is expected to retain or even increase its value in times of market turbulence. Safe havens are sought after by investors to limit their exposure to losses in the event of market changes. So, what is considered a safe haven over time since market conditions change?
What appears to be a safe investment in one down market could be a disastrous investment in another down market. This kind of instruments are helpful for a short period of time, enough to prevent losses in a point of a market turbulence and it reveals how dynamic is the society and how it reacts in front of an economic turmoil.
Throughout human history gold has been synonymous with wealth and luxury – a tangible repository of value – and for hundreds of years was used as a currency in its own right. Gold is considered a safe-haven asset as a store of value in times of economic turmoil. We can admit this because we already know that gold is not limited by time or its validity. No matter to what economic period we refer to, the gold is essentially a currency that cannot be manipulated by the interest rate policies of any government. So it has traditionally been used as a hedge against inflation.
The US Dollar is still the world’s reserve currency and this ultimately means that it is the most liquid currency that is available in the financial trading markets. The International Monetary Fund (IMF) has its reserves in US dollars and taking into consideration that the IMF generally monitors the global economy, we can see the importance of the American currency and why it is weighted as a safe haven investment. It tends to be the currency associated with stable trend moves (usually avoiding excessive volatility) and low transaction costs.
Not coincidentally, two of the most important assets involved in the equation of “Safe Havens” is gold and the US Dollar. It’s necessary to observe how both assets have performed in relative terms over the last few decades. Also, since gold is priced in US Dollars, those two assets share a somewhat inversely correlated relationship in terms of their own trends. Also, it comes in our attention the importance of those assets in the traditional financial markets. All of the most commonly traded world currency pairs include the US Dollar: EUR/USD, GBP/USD, and USD/JPY. This is likely to be a characterization that lasts for many years to come. Usually, assets like gold and the US Dollar tend to rise in value when the stock market is falling.
Certainly, gold and the US dollar are not the only assets considered to be safe havens. Government bonds, Swiss francs and even cash money are forms of safe instruments for investors all over the world, but the historical tendencies still hold weight.
Article author: Adrian Mazilu -trade.Berry founding member
Article co-writer: Renata Cheptene