Portfolio protection has now become a primary concern for traders and investors in the current cyclical environment, with Covid-19, Inflation, Interest rate hikes, and European conflicts creating uncertainty in the world economy lately. To offset risks in their financial portfolios during times of a declining economy like the present, intelligent investors often turn to ‘safe haven’ assets as a hedge. It is safe to say that safe haven assets perform well in financial crises, while others are on the decline.
What is mean by Safe Haven?
The term ‘safe haven’ refers to something that offers security or a way to escape or escape from distressing or dangerous situations. Usually, it takes the form of a place, a moment, a situation, or an object. However, when it comes to trading, it takes the form of an investment, as certain asset classes have a tendency to provide a sensation of safety.
An asset that is considered a safe haven is one whose value is expected to hold or increase during economic uncertainty and fluctuations in the market. When the market is down, investors seek safe haven assets to minimize their exposure. Even so, it is crucial to keep in mind that not all safe haven investments are appropriate for all market downturns, and safe haven investments may vary according to broader economic conditions.
What is a Safe Haven Investment?
Financial markets are not always up-and-running. Downturns and turbulent periods are part of investing and, unfortunately, cannot be avoided. Therefore, investors should prepare for these periods and be aware of how these downturns can affect not only their own investments but also other asset classes.
A safe haven asset will typically exhibit all or most of the following characteristics:
- High liquidity — With high liquidity, you are able to enter and exit positions at the price of your choice even when trading volumes are large. Forex has the highest liquidity due to its large number of participants.
- Functionality — Assets must have a long-term use that will continue to generate demand. In emerging markets, copper demand often increases when infrastructure and agriculture expand.
- Stable demand — In order for an asset to remain useful for the foreseeable future, it must be expected to retain its demand in the future.
- Limited supply — When the supply of an asset exceeds its demand, its value will decline. A scarcity market like gold, for instance, can potentially gain even more value as demand rises.
- Permanence — An asset whose quality can deteriorate may have a smaller market value in the future as its utility declines. Thus, it shouldn’t decay or rot in the long run.
To be able to navigate a financial crisis, traders should be aware of assets considered to be safe havens. In this way, they are able to predict price action and implement the most effective risk-management strategy, whether it is to exit existing long positions or to open new short positions for the situation.
Read on to find out what are some of the most popular safe haven assets to trade in turbulent times.
The Top Safe Haven Assets To Trade
Safe havens can change over time, so it is important to remain up to date with current investment trends in order to avoid becoming obsolete. There are, however, a few safe havens that have remained favorites for years, such as the following.
1. Safe Haven Commodities:
Gold, silver, and palladium, among other precious metals, are potential safe haven assets on the commodity markets.
Gold – World’s Strongest Commodity
Gold is usually the first thing that comes to mind when most people think of safe haven assets. Despite the fact that gold doesn’t have any intrinsic value, mankind has long been attracted to and appreciated the precious metal. It has become so commonplace that many of the world’s largest central banks hold substantial gold reserves themselves in order to protect themselves against inflation and mitigate risk.
It has been proven time and time again that gold’s value has held, or even increased, during times of uncertainty and market downturns. However, psychology is at play as well. In the market, prices are determined by supply and demand. Many investors flock to gold as a safe haven investment during times of uncertainty or falling markets. Consequently, as gold is limited in supply, its price rises as a result of high demand.
Discover the Top Gold Trading tips and strategies that you can follow and catch up on to stay on top of the market!
Other Precious Metals
Even though gold is considered a safe haven commodity by most investors, other precious metals, such as silver and palladium, are slowly gaining popularity as well. Palladium’s price increased over the past few years, so it might share the same safe haven value within the market as gold in the future if its price continues to rise.
Here’s everything you should know about commodities trading, including varying types of commodity investments and the future prospects for the commodities trading sector.
2. Safe Haven Currencies:
In a financial crisis, the below currencies are generally thought to be the strongest, most resilient, and most reliable safe haven currencies.
US Dollar – Global Reserve Currency
Gold and the US dollar are usually mentioned in any discussion of safe haven assets. The US dollar (USD) is a safe haven currency because the US economy is the strongest in the world. The interest rate and exchange rate have typically been stable for a long time. Due to its status as a global reserve currency, the USD is used in many global business transactions and is not adversely affected by domestic or international uncertainties.
Furthermore, the dollar is the most liquid currency on the foreign exchange market, so traders can easily convert their assets into dollars. Below you will find a chart showing the US dollar index, which tracks the USD’s performance over the past five years.
Learn what the strong US dollar has to do with the global economy and how you can take advantage of it.
The Swiss franc (CHF) is the national currency of Switzerland. In times of crisis, traders often take advantage of this country’s low unemployment rates, neutral government, tax-friendly policies, and low-volatility capital markets. Because Switzerland is independent from the European Union (EU), it is not affected by the negative events that occur within the Eurozone, and it is also a popular tax haven for the wealthy.
In times of stock market volatility, demand for the Swiss franc often increases as a result of Switzerland’s robust economy, political neutrality, historically low inflation and safe banking industry.
In addition to the U.S. dollar and the Swiss franc, the Japanese yen completes our list of safe haven currencies. As a safe haven currency, the yen makes an interesting case.
In times of stock market declines in the US, the Japanese yen (JPY) often appreciate against the US dollar. The Japanese yen is a highly liquid currency, and many believe Japan has a strong and stable economy, thus increasing investors’ sentiment toward it.
Governments, businesses, and individual investors in Japan frequently hold large amounts of overseas assets, earning them the title of “world’s biggest creditor”. The yields on foreign government bonds are generally higher than those on Japanese government bonds, which tend to yield less. However, in times of market turmoil or panic, Japanese investors usually unwind their overseas positions and convert them back into their domestic currency. In turn, this increases demand for the yen and its price.
It is a natural phase of the economy to experience economic recessions every 7 to 9 years. Despite the downturn in the stock and crypto markets, there is one market that remains viable. Even during recessions, forex trading provides excellent profit opportunities as it offers income opportunities.
Here is the top 5 Top Reasons to consider Forex trading during the Recession to get you started.
3. Safe Haven Stocks:
During times of uncertainty, some may think that stock markets should be avoided altogether, but there are defensive industries that tend to perform well regardless of what is going on in the broader market. These are considered as safe haven stocks.
So, what are safe haven stocks?
Safe haven stocks are actually company shares that produce goods with inelastic demand, i.e., goods that people will continue to purchase despite any changes in the market. They are collectively called ‘defensive stocks’. It encompasses major stock market sectors like utilities, consumer staples, and healthcare. The demand for defensive stocks usually persists even in periods of economic decline or recession.
A defensive stock is the opposite of a cyclical stock, which is more likely to flourish during times of economic growth and fall during times of hardship. In addition to supermarkets, and general food, beverage, and household suppliers, companies that provide water, gas, electric, and broadband services will always see demand. A perfect example includes the fact that healthcare providers and pharmaceutical companies have performed well during global recessions and pandemics.
If you are looking for a way to accumulate wealth in the financial markets quickly, stock trading could be the best option for you. In fact, there are several successful traders who trade stocks professionally for a living.
Is Trading a Safe Haven Worth It?
Investing in safe havens can be an important part of any trader or investor’s portfolio. A sound investment portfolio diversification is your best defense against a financial crisis and can keep your assets growing. By diversifying your investments, you can experience less volatility and earn higher returns. Having a balanced mix of riskier investments and safe haven investments in your portfolio is a good idea.
Risk tolerance determines how much you should put into each type of investment. Investing in safe havens may be only a small part of your portfolio if you have a high-risk tolerance.
Individual investors need to decide what their investment goals are and how much risk they are willing to take. It might be a good idea to invest in safe haven assets if you’re concerned about market performance or losing a lot of money. Safe havens, however, are not recommended for those seeking higher-risk and higher-reward portfolios.
According to Warren Buffet, an absolute investing genius, successful diversification doesn’t necessarily require a wide variety of assets and diversifying within one asset class will probably get you better results more quickly. Speaking of this, a forex portfolio offers more scope for diversification and profit-making than stocks, metals, or commodities, not to mention being accessible even to beginners.
How to Trade or Invest in Safe Haven Assets
To create a profitable investment portfolio with safe haven assets, it is important to choose a platform that allows you to do so. AximTrade stands out as the best broker in terms of its reliability and excellent trading and investment conditions, offering a wide selection of Forex currency pairs, Stocks, Cryptocurrencies, Indices, Commodities, and Energies, as well as offering various tools for in-depth market analysis.
Here are the 5 simple steps to invest in safe haven assets with AximTrade.
- Open a trading account by logging in to the member account on AximTrade, and clicking on the “+ Open Extra Account” button on the top right.
- Choose your preferred account type. You can choose between Standard, Cent, ECN or infinite leverage accounts. You can also choose a demo account if you’re a beginner.
- Choose the asset type you would like to trade and make a profit from inflation.
- Choose ‘buy’ if you want to go long or ‘sell’ if you want to go short.
- Now your account is ready for trading. You can find all your accounts in the “My Accounts” tab.
To be successful in financial planning, you need a solid foundation of knowledge. If you are considering making your first step into the forex marketplace, copy trade can be an excellent entry point to consider. It is an innovative trading technique that allows new traders to identify successful traders and mimic their trading strategies to profit from their success.