The term safe havens usually refers to financial instruments that increase in value during times of financial crises and economic crises such as recessions and others, as they are used to hedge against risks, and investors resort to safe havens in an attempt to preserve their savings in unstable economic times. The reason why these …
The term safe havens usually refers to financial instruments that increase in value during times of financial crises and economic crises such as recessions and others, as they are used to hedge against risks, and investors resort to safe havens in an attempt to preserve their savings in unstable economic times.
The reason why these assets are called “safe haven” is that they provide safety when fear dominates the markets, for many reasons, including:
Because these financial assets are guaranteed by powerful entities (Too Big To Fail) and include the governments of the most developed countries.
Because investors believe that it will always be liquidable at any time
Because investors know the history of these assets and that they have survived all previous financial crises
Because it is rare and the supply is limited
Because the demand for these assets is guaranteed over the long term
When do the prices of assets classified as safe havens rise and fall?
It depends on the situation of the global economy. Is it good? Or bad?
Investors’ outlook on the market is positive and optimistic? Or negative pessimistic?
Is risk appetite high? Or low?
In good times, when investors do not see any risks on the horizon, their risk appetite increases and they accept assets with high risks and high gains, and this may lead to safe havens losing some of their value.
On the other hand, when investors feel danger and in moments of panic, they look for safe havens to protect their money from the coming storm
gold
Why is gold considered a safe haven? ( the History )
Gold carries cultural and historical symbolism in many cultures. Gold has been used on special occasions such as weddings and celebrations. Gold is seen in many cultures as a symbol of success, wealth and power.
The popularity of gold goes back to its long history, as gold has been used as a store of value for thousands of years, and its history goes back to ancient civilizations such as the Egyptians, Greeks, and Romans, due to its scarcity, durability, and indivisibility.
Confidence in gold is due to previous historical experiences and lessons, especially in the 1970s, during which the precious metal proved its ability to retain its value compared to other assets.
Why is gold considered a safe haven? (Scarcity and limited supply)
Scarcity and abundance are important determinants of prices and the value of things
Gold is one of the rare metals compared to many other metals, which leads to an increase in its value, as the demand for the metal increases while its supply is limited, unlike silver, which is more available, which leads to a decrease in its value.
According to the report issued by the World Gold Council, there are approximately 209 thousand tons of gold in the world today that have been extracted and traded since the beginning of history. In contrast, the world produces 250 million tons of iron and 4 million tons of copper annually.
Why is gold considered a safe haven? (multiple sources of demand)
There are many uses for gold and multiple sources of demand (investment – central banks – jewelry and jewelry – technology).
According to the annual report of the World Gold Council, the sources of demand for gold were investment (39%), the jewelery industry (35%), central bank purchases (19%), and the technology sector (7%).
Why is gold considered a safe haven? (high liquidity)
Gold is considered a highly liquid asset class, which facilitates buying and selling globally
Where you can buy and sell at any time and anywhere
In addition, global recognition and acceptance make it a desirable investment option
Why is gold considered a safe haven? (protection against inflation)
The relationship between gold prices and inflation is direct. The higher the inflation, the higher the price of gold
When inflation rises, the value of currencies decreases and their purchasing power is eroded
Unlike gold, which rises in price and can maintain its strength in times of economic uncertainty
currencies
When a local financial or economic crisis occurs in a country and there is a rise in inflation levels with a decline in the value of the local currency, foreign currencies are the safe haven that savers resort to to protect their savings, especially if it is easy to obtain, but it often accompanies cases of currency collapse. The local banking system is unable to provide foreign currencies, so the black or parallel market exists as an alternative to the official market to meet the needs of savers or importers.
1- Japanese yen
Over the past years, the Japanese yen has succeeded in gaining the status of a safe-haven currency that is resorted to in times of crises and fears of economic recession, as happened in the global financial crisis.
There are many reasons behind this, including: that Japan is the third largest economy in the world – the high Japanese trade surplus and a large volume of exports – the Bank of Japan often follows an expansionary monetary policy and low interest levels, which makes the yen attractive to investors… and many others. Other reasons
2- The Swiss franc
The Swiss franc is considered one of the strong and stable currencies that is classified as a safe haven
The reasons behind this are many, including: the Swiss banking sector is considered one of the best in the world – the rational monetary policy followed by the Swiss Central Bank – the geopolitical neutrality of Switzerland supports the franc as the state of Switzerland distances itself from international and regional political interference and is neutral in all conflicts – the strong economy… …and many other reasons
3- The US dollar
The US dollar is considered a strong currency and a safe haven
The reasons behind this are many, including: America has a stable political system and a strong economy – The size and development of the American financial markets – The dollar is a means of exchange in global trade – Most commodities are priced in dollars, such as oil, gas, gold, and other commodities – The dollar is considered the most widely traded currency in the world. The world – used as a reserve currency by many central banks… and many other reasons
Government bonds
Government bonds, sovereign bonds, or treasury bonds are a type of debt instrument issued by governments to finance their spending needs. These bonds are considered safe investments as they are supported and guaranteed by governments.
Issued by a strong and developed country known for its reliability
Since the financial crisis occurred in 2008, government bonds have been the most important safe havens that people resort to in times of crises. The advantages of bonds compared to gold are that they provide a return in addition to maintaining their value, unlike gold, which only maintains its value while considering it an asset without a return.
Company shares
Defensive stocks
Despite the risks of dealing with the stock market in light of economic turmoil and geopolitical tensions, there are some types of stocks that move up and down less than others (i.e. more stable) and are known as “defensive stocks” as they are found in parts of the market that are less exposed to the economic cycle even in the event of a recession.
These companies serve basic human needs, which brings them profits and gains, regardless of what happens in the outside world
Among the most important of these sectors are the food and pharmaceutical sectors, as they are indispensable commodities
Shares of consumer materials and goods companies – the medical and health services sector – the communications sector
This does not mean that defensive stocks are immune to market recession, as those markets are also vulnerable to falling, but to a lesser extent than others.
investment funds
Investment funds with diversified assets
These funds are one of the types of funds that protect investors from the ups and downs of the market
These funds include a mix of different asset classes, such as stocks, bonds, and perhaps commodities, real estate, and other alternative investments
Maintaining a mix of assets can be a good way to insure against crises
Capital assets
It is usually recommended, in the event of a significant decline in local currencies, that individuals turn to converting their savings into capital assets such as lands, real estate, factories, cars, etc., but one of the problems with this alternative is that liquefying the assets may take some time, which is not suitable for some savers.
