What is a safe haven?
“Safe haven” is a very versatile term that could have multiple meanings depending on the context in which it is used.
What is a safe haven in finance? As any investor knows, financial markets can be a very volatile place, especially during times of uncertainty. This uncertainty can be caused by any number of factors like pandemics, wars, regulatory risks, or even political elections. When uncertainty occurs and volatility strikes, investors tend to look for a flight to safety. They search for assets that they can invest their money into that will likely retain or increase their value during these times of market turbulence. These are called safe haven investments.
Some safe haven assets examples include government bonds, gold and so-called “defensive stocks”, as well as some major currencies. A safe haven currency means a currency that is a reliable store of value during periods of uncertainty. While assets like gold and bonds are easily understood to be safe havens, currencies are not typically thought of as such. However, some currencies like the US dollar (USD) or the Swiss franc (CHF) are considered to be safe havens thanks in large part to the strength of the nations’ economies and their robust banking systems.
In the meantime, gold is one of the most popular safe haven commodities as it cannot be printed and its value is not impacted by interest-rate decisions. Other safe haven commodities include silver, copper, sugar and livestock as these are negatively correlated with stocks and bonds.
Where have you heard of safe havens?
The concept of a safe haven investment is well-known among investors and economists and is widely discussed during periods of economic and/or political instability.
What do you need to know about safe havens?
Every investor needs to be aware that investing their capital into any asset will always incur a risk. There is no such thing as a “risk-free” investment. Even holding cash in a bank account carries the risk of devaluation due to inflation. This principle holds true even with safe haven investments. These investments are not guaranteed to maintain their value and you should do your own due diligence before investing.
Further, what constitutes a safe haven changes over time. While today we consider gold to be a safe haven investment during times of volatility, this may not always be the case. There may come a day when the precious metal is no longer a safe haven and another asset has taken its place. This is also true of “defensive stocks”, while stocks of companies such as McDonald’s (MCD) may be considered to be defensive today, this may change tomorrow.
Lastly, investors should keep in mind that while safe haven investments may be beneficial during a market downturn, they are likely to underperform other assets in a risk-on environment.