Safe haven assets are known for maintaining their value during periods of economic uncertainty. Liquidity often shifts towards these assets, causing them to increase in value. The status of assets as safe havens can change depending on the economic climate. However, market participants have consistently favoured the following assets as safe havens:
Gold
When thinking of a haven, gold is undoubtedly the first asset that comes to mind. As a physical commodity, the supply of gold is not dependent on central bank policies like currencies. Gold naturally forms in the Earth's crust and is extracted through mining activities, and the amount that can be mined is gradually decreasing. The scarcity of gold ensures its value retention and the long-held belief that it serves as a store of value continues to make it the first choice during uncertain times.
Gold typically has a negative correlation with stocks, government bonds, and major currencies like the US dollar. When the value or yield of these assets falls, investors often turn to gold as a safe haven.
Government Bonds
Government bonds, notes, or bills are debt securities issued by the government that pay periodic interest and promise to repay the principal at maturity. Investors tend to trust the bonds of developed economies more. The most popular debt securities are US Treasuries. The reliability of US bonds is based on the strength of the US economy, the creditworthiness of the US government, and the yield in US dollars. Investors are confident they will fully recover their investments due to the high creditworthiness of the US, thus viewing US bonds as risk-free safe haven assets.
Similarly, government bonds from other strong economies, and for local investors, their own government's bonds, are also considered safe havens under similar economic conditions. Government bonds generally have an inverse correlation with stocks, particularly commodities like gold, and the values of currencies.
American Dollar
The U.S. economy is the largest in the world, and the U.S. dollar is the primary reserve currency globally. Additionally, the USD is primarily used in international trade transactions. These features make the U.S. dollar one of the most popular safe-havens. While the value of the U.S. dollar against other currencies may fluctuate due to economic developments or sometimes political reasons, the U.S. dollar conventionally continues to maintain its status as a haven.
Japanese Yen
Japan's economy was restructured in the second half of the 20th century and has become one of the largest economies in the world. Japan is a significant exporter, and a large portion of its income comes from trade surpluses. These characteristics of Japan have made the Japanese Yen a haven.
The Japanese Yen has been preferred as a haven in uncertain situations in Asian markets. Additionally, it is often observed that the Yen gains value against the USD, especially when there is volatility in U.S. stocks or treasury bonds. This is because Japanese investors have significant overseas investments, and during periods of uncertainty, they tend to convert their investments into the local currency, thereby increasing demand for the Japanese Yen.
Swiss Franc
Switzerland's strong and stable economy, independent monetary policy, low debt level, low-volatility capital market, and the Swiss government's political neutrality enhance the reliability of the Swiss Franc. Switzerland's independence from the European Union makes the Swiss Franc one of the preferred currencies as a safe haven, especially during economic or political uncertainties in Europe.
Conclusion
During periods of uncertainty, while the value of other risky assets declines, safe haven assets usually maintain their value. Therefore, safe haven assets hold a strategic place in every investor’s portfolio.