A guide to trading safe-haven assets
Rebecca Cattlin May 19, 2022 10:39 AM
Safe-haven assets are uncorrelated to the economy, so they’re expected to maintain value during economic downturns. Find out how to trade safe havens including gold, currencies, t-bills and defensive stocks.
What is a safe haven?
A safe haven is an asset that is expected to retain or even increase in value during periods of downturn and volatility. When financial markets experience turmoil, money flows into safe-haven assets to limit losses and diversify away from risk-on instruments.
Safe-haven investments are commonly part of an investor’s portfolio, but they’re equally as important for short-term traders to understand too in order to predict market movements and take the appropriate position.
What makes an asset a safe haven?
A safe haven asset is defined through its correlation with the market or economy as a whole: the asset has to appreciate when the economy crashes. Almost any tradable instrument can be a safe haven, be it a currency, a stock or a commodity.
There are characteristics that most safe havens have in common, including:
- High liquidity – the asset should be easily bought and sold at any time
- Limited supply – an asset with a maximum supply tends to hold its value better
- Constant demand – the asset needs to have a certain level of ensured buying pressure
- Functional uses – assets with practical uses have steadier demand
- Permanence – an asset that doesn’t decay over time is considered more valuable
While certain assets have a reputation as being reliable safe havens, the flow of capital can depend on the causes of a downturn. For example, if the US economy is collapsing, it’s unlikely the dollar would be seen as a safe haven. So, it’s important to do your due diligence into the history of each safe haven and understand the economic situation at hand.
What is a safe haven used for?
Safe havens are used as part of both investing and trading strategies. Depending on your goals, you might choose to use safe-haven assets to:
- Build long-term profits over several years
- Diversify your exposure to more volatile assets
- Speculate on whether safe havens will rise or fall in price
For example, if you thought gold was going to receive safe-haven inflows due to an upcoming bout of inflation, you could buy gold CFDs, taking the position that its price will rise.
Alternatively, when you think that the market is returning to normal, you could go short on safe havens with the expectation that their value will fall as investors turn their gaze back to more risk-on asset classes.
Practise trading safe havens in a risk-free environment with a FOREX.com demo account.
Examples of safe-haven assets
Safe havens can change from downturn to downturn, but some consistently receive attention, such as:
- Safe-haven currencies (CHF, USD and JPY)
- Treasury Bills (T-Bills)
- Defensive stocks
Gold as a safe haven
Gold has long been considered a store of value because it has a finite supply, and its value is not impacted by interest rate decisions. This makes it a popular hedge against inflation, and one of the most famous safe-haven assets.
The position of gold as a safe haven has become so well-known that it’s almost a self-fulfilling prophecy – because gold is viewed as a safe haven, investors flock to buy gold when markets fall, with little thought to other strategies.
Other metals, such as silver, also often perform in the opposite direction of stocks and bonds, so can be considered safe havens too.
Certain currencies attract investment during economic downturns thanks to the stability of their country’s political system and economy. Popular safe-haven currencies include:
The Swiss franc (CHF)
Given the stability of the Swiss government and its financial system, CHF usually performs well when other economies are struggling. Switzerland also boasts a large and safe banking industry, and one of the highest standards of living in Europe.
The country is also considered relatively independent from the global system, given its historic neutral stance toward geopolitical events. This helps maintain the CHF’s reputation as a stable currency when a crisis strikes.
US dollar (USD)
The US dollar is often thought of as the default safe haven, due to its position as the world's reserve currency and the fact most international transactions are denominated in USD.
When US interest rates are low – as they have been since the Coronavirus crisis – the currency also becomes an attractive currency carry trade, boosting its popularity further.
It’s important to mention that as the US dollar strengthens, corporate profits for US companies decline, which is another factor to consider when assessing your trading plan and portfolio.
See our guide to the US dollar.
Japanese Yen (JPY)
The Japanese Yen has earned its position as a safe haven due to the fact it appreciates when US stocks and bonds experience volatility.
This happens because the value of foreign assets owned by Japanese investors is greater than the value of Japanese assets held by foreign investors. So, when domestic investors start to sell their assets in financial downturns, more money flows into the country than out of it, raising the value of the Yen.
The Yen is a safe haven in spite of the government’s history of quantitative easing, which hasn’t dampened liquidity.
Learn more about the Japanese yen.
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Treasury Bills (T-Bills)
Treasury bills (t-bills) are debt instruments that have short-term maturities, normally within a year, and pay no interest. The principal – the value of the bond – will be paid back by the US government at maturity.
US Treasuries have been seen as one of the premier safe havens for the past few decades due to the reputation of strength and stability of the US economy – which gives investors confidence that the government won’t default on their debt obligations.
There is a large Treasury bond market, which has created high liquidity and market depth, which attracts investors from across the globe. The more investors, the less risk for the Treasury, which further enhances the safety of the bonds, and encourages even more investors to purchase them. Essentially, the whole market is a never-ending cycle.
Learn about treasury yields.
Regardless of the state of the economy, certain companies continue to prosper because they provide consumers with essentials, such as utilities, healthcare, biotechnology, and consumer goods.
Collectively, the shares of these companies are known as defensive stocks, and they’re usually considered reliable safe-haven stocks. After all, even in financial downturns, people will still buy food, health products, and basic home supplies.
These companies will typically retain their value during periods of uncertainty, and the increased demand for safer stocks can even boost their share prices.
What are the best safe haven investments?
It is not possible to categorically state which the best safe haven assets are because they will change depending on the economic environment. So, research into the state of the market is needed to assess which instruments might offer the greatest security.
A common strategy is to diversify across a range of safe haven assets, to essentially hedge your bets on which one will provide the strongest protection. Treasury bonds, corporate bonds, precious metals and dividend-paying stocks are among the most common defensive plays.
Start trading safe-haven assets
You can speculate on the performance of safe havens with FOREX.com in just four easy steps:
- Open a FOREX.com account, or log in if you’re already a customer
- Search for the asset you want to trade in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
Or you can try out your safe haven trading strategy in a risk-free demo trading account.
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