Safe Haven Assets: Trading on Gold, Bonds and Crypto

Selected highlights:  

• A study on safe haven assets during the COVID-19 pandemic shows that the role of “safe haven” became less effective for most asset classes, bucked only by gold and soybean commodity futures. 
• Companies such as Tesla and Block have added Bitcoin to their balance sheets, signalling a high degree of confidence in crypto.

In times when economic uncertainty occurs and the economy is in crisis, investors tend to utilise financial instruments to compensate for their portfolio losses. Such assets are referred to as safe haven assets because they are susceptible to appreciation during challenging times of economic instability.

In this article, we will examine the use of safe haven assets within traditional finance, the main types available and how to trade them. We then discuss whether crypto can be defined as a new safe haven asset of the fourth industrial revolution.

In the crypto world, market downturns have been associated with the term 'crypto bear market'. You can read all about it here: 'What are the signs of a Bitcoin Bear Market?'.

What are safe haven assets?

A safe haven asset can be defined as a financial instrument that is expected to retain or gain value during periods of economic and market downturn. Such assets are uncorrelated or negatively correlated with the global economy as a whole. In other words, they can appreciate in the event of market volatility and crashes.  

Investors seek out safe haven investments to limit their exposure to losses in times of market turbulence. However, keep in mind that safe haven assets may vary depending on the specific nature of a market crash. Investors still need to perform due diligence every time to pinpoint the right safe haven investment for their needs. 

Are there any disadvantages to safe havens?

As safe havens typically rise in value when stock markets fall, this may have an adverse effect when the stock markets are rising, meaning that your investments may be less valuable. Apart from some popular options, safe haven assets may change over time. Keep in mind that it is important to diversify your investor's portfolio.

Common characteristics of safe haven assets

What makes a good safe haven investment for one market downturn, may not be a good choice for another economic climate. Nevertheless, there are certain characteristics these assets share. Let’s explain them briefly. 

a. High liquidity

This basically means that a safe haven asset needs to be easily convertible to cash at any time. Using assets with significant trading volumes, you can enter and exit positions at the desired price without experiencing slippage. 

Slippage is a financial term used to describe an event when a trade order is filled at a price that is different from the requested price. It is a common occurrence in forex trading. 

An example of a highly-liquid safe haven asset is the currency pair British pound/Japanese yen (GBP/JPY). When market downturns or a global financial crisis are on the rise, the common go is to make use of currency pairs like this. 

b. Limited supply

If a particular asset supply outpaces its demand, its value may grind down. Simply, the growth of supply should never outweigh the demand. 

You are probably familiar with the popular financial law of supply and demand. Supply and demand is the relationship between buyers and sellers that is used as a measure for price determination in financial markets. These forces interact to affect an equilibrium price where the quantity of demand equals the quantity of supply. 

Assets such as gold, which have a scarcity of supply, are likely to reach a value residing in that scarcity and a potentially higher value when demand increases. 

c. Demand certainty

Certainty of demand means that potential safe haven assets are unlikely to be replaced or become outdated. A true safe haven asset is expected to retain a certain amount of demand in the future to ensure confidence in its future utility.  

The asset should be able to maintain high demand in the long term, which makes such an asset hard to replace with another investment.

Warren Buffett once said: 'Our favourite holding period is forever'. This described the ideal deman certainty, which makes crypto somewhat a question mark for traditional investors like Buffett. They aren’t necessarily opposing views, though. If you want to read more about Buffet's investment-related wisdom, take a look at this article: 'Applying Warren Buffett's investing wisdom to crypto'.

Safe haven investments that encompass a future demand certainty are products that shall be needed regardless if there is economic turmoil. For example, people will still need access to water, electricity and gas, even if the economy is performing poorly.

d. Utility

This feature is linked to the previous one – certainty of demand. We may ask ourselves whether an asset has enough use cases, for example in industrial applications, for it to have substantial and certain demand? 

The asset needs to have a use that will continually provide long-term demand. For instance, copper has a wide range of uses in agriculture and infrastructure. Therefore, its demand often increases when emerging markets maximise development. 

While past performance isn't a good indicator of future performance and high confidence, a wide range of uses may classify such assets and safe havens.

e. Permanence

Permanence simply means that a particular asset does not decline its quality; it doesn't rot or decay.  On the contrary, assets that are capable of deteriorating in quality may experience lower demand in future as their utility may decline. 

Traditional types of safe haven assets

Safe havens may change over time, so it is good to keep up with new investment trends. However, there are few asset classes that have remained popular over the years.

Gold

When you think of safe havens, gold will probably be your first choice. That is not unusual since gold has been praised as a store of value for years. Since it is a physical commodity, it cannot be printed as money, and its value is not impacted by interest rates laid down by central banks and governments. 

This precious metal always managed to maintain its value over time as a form of insurance against economic turmoil. When times of economic uncertainty arrive, most investors choose to pile their funds into gold, driving up the price of the gold market. 

A recent major example of gold as a safe haven is the 2008 global financial crisis when the influx of investment caused the price of gold to rise nearly 24% during 2009 alone, and it continued its upward course into 2011. 

Government bonds

Government bonds are debt securities issued by a government to support its spending and obligations. It is simply an ‘I owe you’ statement from a government that encompasses periodic interest payments.  

These interest payments are treasury bills and notes as types of bonds. The difference between them is the amount of time you will be reimbursed entirely.  

Usually, investors have more faith in bonds issued by governments of developed countries, such as the popular US treasury bills. They are categorised as safe havens due to the credit status of the US government and the high standing of income in US dollars. 

A stable income acknowledges that government bonds may be a low-risk, or even a risk-free, safe haven asset and that invested money is going to be repaid fully. For example, in 2018 stocks crashed due to rising bond yields, and this event ironically led investors into obtaining US treasury bonds. 

Defensive stocks

As we mentioned above in the text, people are going to buy certain products regardless of the state of the market, such as food, water, health products, gas and home supplies. Companies operating in the defensive sector and issuing defensive stocks will retain their values during times of economic instability. 

Defensive stocks tend to perform better than the wider stock market during recessions. It is a term that describes the shares of companies that are providing essential goods and services such as utilities, food, beverages, consumer staples and health care. 

Safe haven currencies

Fiat money currencies are considered safe haven assets as well. Apart from some safe haven assets mentioned before such as the currency pair British Pound/Japanese Yen, there are some other popular choices as well. 

Swiss francs are considered a safe haven currency due to the stability of the Swiss financial system. Even though the Swiss franc faces severe upward pressure coming from increased foreign demands, the Swiss government manages to maintain a broad and stable banking industry, positive trade balance figures and a high standard of living.  

Did you know that Switzerland is a crypto-friendly country and a good option to establish a decentralised autonomous organisation (DAO)? You can read more about it here: ‘DAOs: In Search of Legal Personality & Limited Liability’.  

The US dollar has been one of the most popular safe havens during economic downturns for over 50 years. It represents a highly liquid and high-quality investment that typically exhibits negative correlation to risk assets during financially tough times. 

High confidence in the US dollar stems from the 1944 Bretton Woods agreement, which introduced a fixed currency system and made the US dollar a global primary reserve currency. Even after this structure was abolished, the US currency retained its safe haven position. 

Does crypto have safe haven asset potential?

Crypto hasn’t been considered a safe haven until investors started dumping precious metals such as gold for cryptocurrencies as inflation was picking up. More than $10 billion has been pulled from the biggest gold exchange-traded fund and physical gold hoards have been selling down as well. While the price of gold has declined, Bitcoin managed to double in price and achieve an all-time high. This information may seem confusing, especially taking into account that the crypto market is widely known for its volatility.

Cryptocurrency can be defined as a digital asset designed to function as a medium of exchange. Digital currencies such as Bitcoin and Ethereum managed to gain popularity in recent years. Cryptocurrencies are digital, intangible assets that are not linked to any central authority.

Advantages of cryptocurrencies as safe havens

One crypto advantage is its accessibility. Cryptocurrencies can be easily traded in the digital environment. Therefore, they are accessible to anyone with an internet connection. Since they can be accessed easily, it is easy for investors to use crypto to diversify their investment portfolios. While gold and other precious metals are not so easy to come by, this notion may add up to wider adoption of cryptocurrencies. 

Another crypto upper hand is its security. Since it is built on blockchain technology that encompasses a high degree of security, transparency and advanced cryptographic methods to ensure tamper-proof transactions, cryptocurrency is considered a safe investment. Blockchain technology is the main reason why cryptocurrencies cannot be counterfeit or vulnerable to fraud such as fiat money. 

Lastly, crypto is decentralised. That is actually the first term you acknowledge once you step into the crypto world. Unlike many other safe havens that are subjected to the conditions of the market, cryptocurrencies are not tied to any government or central authority. This simply means that, even though they are associated with particular other risks, are not subject to the same risks as traditional investments.  

If you want to find out more about the importance of decentralisation, why not read this article: ‘What is decentralisation & why is it important?’.

Is crypto a safe haven for equity markets? A Covid-19 perspective

We’ll tell you the study results right away – Bitcoin and Ethereum are not found to act as safe havens for international equity markets.

In fact, the study found evidence of increased downside risk for investors’ portfolios consisting of any allocation to these two digital assets in relation to holding the underlying equity index in isolation. 

A good thing is that digital assets were considered at some point in time as a safe haven asset, forecasting that a wider adoption of crypto throughout the years could lead to such a classification. 

Interestingly, the stablecoin Tether was found to act as a safe haven over the recent period, including the Covid-19 pandemic. If you are familiar with the Tether affair, you already know that it caused losses due to an unstable peg with another safe haven – the US dollar. From an asset management perspective, it seems unclear at the time why an investor would favour Tether over traditional cash holdings in US dollars. 

If you want to know more about Tether, check out this post: ‘Tether (USDT)’. 

Even though cryptocurrencies didn’t manage to make the list of safe havens during the Covid-19 pandemic and financial crisis, the good thing is that many investors have been considering crypto as a safe investment. 

The million-dollar question: Is Bitcoin better than gold?

Cryptocurrency successfully went through some market downturns. Bitcoin has acted as a safe haven at some points but didn’t manage yet to become a traditional safe haven such as gold. 

Even though cryptocurrencies encompass a number of benefits that may put them on that list someday, this notion may be the result of Bitcoin not having the same degree of liquidity as gold. Traditional safe havens such as gold have a lot more liquidity bridges and gateways to facilitate flows to and from stocks and bonds. 

Another reason is that crypto still involves a high degree of market volatility. This trait still raises suspicion among many investors and detracts crypto from its safe haven appeal. 

However, interest in digital currencies has surged over the years, causing the total market value to skyrocket. As the investor base has been undergoing change since the adoption of crypto and blockchain has become wider, it seems that crypto may have a safe haven future after all.