What Is A Safe Haven Asset?
Safe haven assets are investments that investors turn to during times of market volatility and instability, i.e., to "weather the storm." These investments are perceived to be safe from losses during market turmoil or are negatively correlated to the market at large, meaning they may go up in price when the majority of other assets, mainly stocks, are losing value.
Most Common Safe Haven Assets
U.S. Government Securities
These debt instruments are backed by the full faith and credit of the U.S. government and are believed by most investors to be the safest in the world against default. While securities issued by a handful of other developed-world governments are also considered safe havens, such as German bunds and Japanese government bonds, U.S. Treasury securities are seen as the safest of all and virtually "risk free." Prices of Treasury securities often rise in value during times of market turmoil as a result of the higher demand, so investors often make money in a crisis.
For many of the same reasons, the United States dollar is often a safe haven for investors outside the U.S. Likewise, the currencies from other large developed countries and areas, such as Japan and the eurozone, also act as safe havens. In particular, the Swiss franc acts as a safe haven by virtue of its perceived strength and independence from other countries.
Investors often flock to gold in times of turmoil because of its long history as a store of value, particularly one that is not tied to any government or currency. As a result, the increased demand during troubled times offers investors the chance to profit during market dislocations. Gold has also long been seen as protection against inflation. Until fairly recently, many countries pegged the value of their currencies to the price of gold.
These are stocks issued by companies that provide necessities that people need regardless of the state of the economy or financial markets, such as utilities, health care and consumer staples (food and beverages). While these stocks are not immune from a falling stock market, they often hold up better than the market at large. They also often carry high dividends, which can provide investors with a cushion against losses. Many of these companies are also well-established with little risk of failure or default.
Keeping money in the bank also insulates investors from down markets. However, especially given the low interest-rate environment (as of this writing in August 2019), cash may not keep up with inflation.
Safe havens are financial assets that investors turn to to protect themselves or even profit from periods of market turmoil. The most common safe haven assets are U.S. government securities, the U.S. dollar, gold, defensive stocks and cash.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…