What is a Safe Haven Asset?
Even though there isn’t such a thing as the safest form of trading, there are ways to trade diligently at times when the market is facing trouble. When the market is experiencing some trouble or high amounts of volatility, there will be certain assets that a trader will turn to as they expect it to rise in value. If the market were to crash then the safe haven is most likely to appreciate in value.
In order to trade a safe haven plenty of attention should be given to the financial markets. The safe-haven asset depends on the market that is depreciating.
What are the characteristics of a safe haven?
There are characteristics that some assets will have, which is why they are known as a safe-haven. These characteristics include:
- Liquidity: In order to be a safe haven the asset will need to convert to cash at any given time.
- Longevity: The safe-haven asset will need to have long-term investor demand. As well as this the supply level should never outweigh the demand.
- Certainty: There will always be a need for the safe-haven asset. It is not likely for the asset to be replaced at any point.
However, this not to say that all safe havens have the following characteristics. The trader will be able to judge which safe-haven asset suits the market conditions at the time. One safe haven may suit a particular market downturn but could cause the opposite effect and not show positive results in another market.
The different types of Safe Haven Assets
There has always been a demand for this particular precious metal, especially during a market downturn. The value of Gold is not affected by any monetary policies the governments put in place. When the markets are affected by an economic event, traders tend to buy gold which in turn, drives its price up as demand has increased. During the global financial crisis, the demand for Gold was so high that it caused its price to surge by 24%. This trend continued up until 2011.
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There are certain sectors which will not be affected during an economic crisis as there will always be a steady demand for these. Consumers will always need food and other staple items, so the sectors which will see trading demand include utility, healthcare and consumer goods companies.
Holding cash is commonly seen during the market downturn and market crashes. It is important to note that physical amounts of cash will not provide any returns as it won’t appreciate in value.
There are some currency pairs within the FX which are considered to be safe-haven currencies. During times of volatility, traders will turn to these currencies as a form of protection. An example of a safe haven currency is the Swiss Franc, and there is always large amounts of demand for this currency due to the stability of the country’s financial system. The country’s economic health isn’t affected by any negative political and economic events in Europe, as Switzerland is not part of the European Union. The Japanese Yen is also considered to be a safe haven currency as it often appreciates against the US Dollar, as well as the country’s high trade surplus against it’s national debt figure. The US Dollar is another one traders turn to in times of trouble. It is also the most liquid currency within the forex market.
Treasury bonds are an example of bonds issued by the government. It is something that investors might prefer as they are based on the credit status of the issuing government. Once the bill has matured then anything invested will be repaid in full.
Trading on margin is high risk.