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.
Other Safe-Havens:
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.
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Editors’ Picks
EUR/USD ticks north after ECB, US inflation data
The EUR/USD pair hovered around 1.1750 but is still unable to conquer the price zone. The European Central Bank left interest rates unchanged, as expected, upwardly revising growth figures. The US CPI rose 2.7% YoY in November, down from the 3.1% posted in October.
GBP/USD runs beyond 1.3400 on BoE, US CPI
The GBP/USD pair jumped towards the 1.3440 area on Thursday, following the Bank of England decision to cut rates, and US CPI data, which resulted much softer than anticipated. The pair holds on to substantial gains early in the American session.
USD/JPY rises to near 156.00 ahead of US CPI data, BoJ policy decision
USD/JPY moves higher to near 156.00 in the countdown to the US inflation data. Fed’s Bostic sees inflation more worrying than the job market. The BoJ is expected to raise interest rates by 25 bps to 0.75% on Friday.
Editors’ Picks
US CPI falls beyond expectations, US Dollar sinks; ECB and BoE announcements added to USD decline – LIVE
The US Consumer Price Index was much softer than anticipated in November, leading to US Dollar losses across the board. Earlier in the day, the European Central Bank kept rates unchanged, while the Bank of England trimmed rates, both in line with expectations.
GBP/USD runs beyond 1.3400 on BoE, US CPI
The GBP/USD pair jumped towards the 1.3440 area on Thursday, following the Bank of England decision to cut rates, and US CPI data, which resulted much softer than anticipated. The pair holds on to substantial gains early in the American session.
Gold remains silent around $4,330 after first-tier events
The bright metal cannot attract speculative interest on Thursday, despite central banks announcements and the United States latest inflation update. XAU/USD is stuck around $4,330, confined to a tight intraday range.
Crypto Today: Bitcoin, Ethereum hold steady while XRP slides amid mixed ETF flows
Bitcoin eyes short-term breakout above $87,000, underpinned by a significant increase in ETF inflows. Ethereum defends support around $2,800 as mild ETF outflows suppress its recovery. XRP holds above at $1.82 amid bearish technical signals and persistent inflows into ETFs.
Bank of England cuts rates in heavily divided decision
The Bank of England has cut rates to 3.75%, but the decision was more hawkish than expected, leaving market rates higher and sterling slightly stronger. It's a close call whether the Bank cuts again in February or March.
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