Safe haven assets are usually sought after by investors to limit their exposure to losses in the event of market downturns. There are times, such as during an economic recession, when the downturn of the market is prolonged. When the market enters such turbulent times the value of most investments falls steeply. During these times, investors look to buy certain assets that are uncorrelated or negatively correlated to the general market. These types of assets are also known as “safe haven assets”. A safe haven therefore, is an asset that is expected to retain or increase in value during times of uncertainty or market turbulence.
Why is gold seen as the ultimate safe haven asset?
For many capital investors, gold is seen as a safer asset to buy and hold because it is a physical asset, meaning it can’t be printed like money – and so its value cannot be changed in this way. Because gold has historically maintained its value over time, it serves as a form of insurance against adverse economic events. Gold prices generally increase when extreme events occur. What is more, gold is negatively correlated to the U.S. dollar, a strong dollar makes bullion more expensive to buy and hold and therefore pushes gold prices lower and vice versa. At times when the USD is trading lower, investors tend to pile gold.
Examples of other safe havens include defensive stocks, such as utility, healthcare, biotechnology, and consumer goods companies. These stocks tend to withstand recession because regardless of the state of the market, consumers are still going to purchase food, health products, and basic home supplies. There are also safe haven currencies such as the yen and the Swiss franc. The yen is seen as a safe haven due to its high trade surplus versus its debt, as well as its historic stability, while the Swiss franc’s recent scrapping of its cap versus the euro may make it easier to flee to in times of volatility.
How does this apply to Forex/CFD trading?
When it comes to Forex/CFD trading, it is important to remember investors do not buy and hold the actual asset, they are merely speculating on the asset’s price changes. Even so, it is important to know about these general market behaviours as they are also reflected on the price changes of certain assets. For example, at times when investors flock to buy gold, the price of XAUUSD edges higher and vice versa.
What it is worth remembering is that, while any assets that are seen as safe havens are appealing when a crisis is in process, there is really no guarantee that investors will always flock to buy certain assets. Remember, investments can go down as well as up and in the case of Forex/CFD trading, you need to ensure you understand the risks involved before investing.