Safe-Haven Investments In A Troubled World

Safe haven currencies are those that are expected to either retain or increase in value when the market is under stress, from regional and global events and general market fluctuations.
This is why safe havens are always sought by investors to mitigate financial risk. Some will run to them when economic turbulence hits while others spread a certain percentage of their investments to always be in safe havens. Which strategy that works for you depends on how much you have to invest and how safe you want to play the game.

What are Safe Havens?

For the US there are mainly three major safe-haven currencies (and their related safe-haven investments):

For commodities there is the classic, which of course is:

  • Gold 

Gold is and has almost always been considered a safe-haven asset for investors. It is not just mythical kings like Midas that love gold. Should you have a wish to set some investment funds aside is something that will be inherently safe, you can always bet on gold.

The Gold Standard

You have probably heard the term “The Gold Standard” in relation to investing. But what exactly is the gold standard?
Investopedia defines the gold standard as:

The gold standard is a monetary system where a country’s currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price.

Why Do We Need Safe Havens?

Experts define safe-havens due to their strong liquidity and historical reliability. For instance, both government bonds and currencies are on the list, due to their foundation in highly regarded legal and regulated systems.

Even though the same handful of core assets are widely recognized as safe havens, they don’t always behave the same in every crisis. Safe haven status changes over time depending on the specific circumstances and events. For example, historically, when a country with a safe haven currency experienced turbulence its currency would depreciate against other safe havens as investors sought other ways of mitigating risk.

Currency levels

A currency has value, or worth, in relation to other currencies, and those values change constantly.

For example, if demand for a particular currency is high because investors want to invest in that country’s stock market or buy exports, the price of its currency will increase. Just the opposite will happen if that country suffers an economic slowdown, or investors lose confidence in its markets.

While some currencies fluctuate freely against each other, there are others like the Japanese yen and the US dollar that are linked to each other. They may also be linked to another currency, such as the US dollar or the euro, or to a basket, or weighted average, of currencies.

forex trading pairs

Currency fluctuations are a natural outcome of floating exchange rates, which is the norm for most major economies. Numerous factors influence exchange rates, including a country’s economic performance, the outlook for inflation, interest rate differentials, capital flows, and so on. A currency’s exchange rate is typically determined by the strength or weakness of the underlying economy. As such, a currency’s value can fluctuate from one moment to the next.

How Does Currency Levels Impact The Economy?

A currency’s level directly impacts the economy in the following ways:

Merchandise Trade

This refers to a nation’s imports and exports. In general, a weaker currency makes imports more expensive, while stimulating exports by making them cheaper for overseas customers to buy. A weak or strong currency can contribute to a nation’s trade deficit or trade surplus over time.

Capital Flows

Foreign capital tends to flow into countries that have strong governments, dynamic economies, and stable currencies. A nation needs a relatively stable currency to attract capital from foreign investors. Otherwise, the prospect of exchange-rate losses inflicted by currency depreciation may deter overseas investors.

Inflation

A devalued currency can result in “imported” inflation for countries that are substantial importers. A sudden 20% decline in the domestic currency could result in imports costing 25% more, as a 20% decline means a 25% increase is needed to get back to the original price point.

Interest Rates

As mentioned earlier, exchange rates are a key consideration for most central banks when setting monetary policy. A strong domestic currency exerts a drag on the economy, achieving the same result as a tighter monetary policy (i.e. higher interest rates). In addition, further tightening of monetary policy at a time when the domestic currency is already strong may exacerbate the problem by attracting hot money from foreign investors seeking higher-yielding investments (which would further strengthen the domestic currency).

Safe Havens And Covid-19

With the most recent coronavirus outbreak which we are experiencing in 2020, we are beginning to see the effects on the markets. Covid-19 has been grabbing the headlines since mid-January and will likely last for longer, and there is no way at this time to predict the impact it will have in the long run, and some investors are already running to safe-havens. We do not yet have enough data, but we do expect fluctuations and some irregular and unexpected fluctuations as the spring and summer of 2020 goes on.

One thing that many investors are discussing is if it could have any effect on Sino-American trade tensions. Or if the Asian currencies will weaken towards the US Dollar. And what will happen to the Euro, since Europe is now experiencing dramatic rises in cases and most countries have implemented various levels of lockdown?

In our opinion, this is not the time to panic or jump to conclusions. The pandemic is global and we are in the middle of it.

This covid-19 pandemic is set to last for a significant period of time and we have no way of knowing when it diminishes. In addition to covid-19 other troubles will likely worry investors and trigger flows into safe havens as well.

Gold is, once again, topping the list of havens in 2020, pushing the Japanese Yen (JPY) to second place. US and German bonds are rising in prominence alongside the Swiss Franc (CHF).
Bitcoin’s status as a safe-haven asset it still a works in progress, but those with substantial amounts to invest which they can leave be for a longer period of time; are also considering Bitcoin and other cryptocurrencies as safe-havens.

The new year has resulted in different trends, with some assets becoming more prominent, others losing some shine, and some have become trickier to trade.

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