The term "safe haven" might instantly make you think of a place where people can be protected from all harm or danger, especially in areas of military activity. Meanwhile, in the dictionary of various financial concepts, safe haven refers to an investment that retains or increases its value, during the times of uncertainty, when other investments' values are falling down.
In the times of financial markets drowning in complete turmoil, people tend to have problems trusting banks. They look for various ways to limit their exposure to losses due to some possible market downturns. Even in the market peacetime, safe-haven investments are frequently chosen to diversify investors' portfolios.
People usually view safe havens as defensive stocks, bonds, gold, commodities, particular currencies, real estate, or private equity. Let's have a look at some of the most popular choices when it comes to safe-haven investments.
Gold is one of the first examples we can think of. Its magic lies in the fact that it is a physical commodity that cannot be printed like money. Additionally, its value is not impacted by central banks' decisions about interest rates. Its power also has a source in historical sentiment and general human perception of this precious metal. As Rhymer Rigby wrote in his article for The Guardian: "Centuries of symbolism mean that gold's emotional and psychological value is unlikely to fade anytime soon." Other types of commodities, like silver, copper, sugar, or corn, are also negatively correlated with stocks and bonds, which makes them serve as typical examples of safe-haven investments.
When it comes to the capital market, government bonds of stable countries tend to be considered one of the safer choices for investors. One of their main advantages is information insensitivity. That appears when two sides enter a transaction without fear of having less information about the asset than their partner. Of course, we shouldn't forget that government bonds are not 100% safe, because they can be influenced by inflation or changing interest rates.
Examples of defensive stocks – which also serve the role of safe havens – include shares of utility, healthcare, and biotechnology companies. They are perceived safe because regardless of the situation experienced by the markets, people still need to consume food, purchase necessary medications, or basic home supplies. During significant uncertainty, the demand for the products and services of defensive sectors could even rocket remarkably, fueled by periods of panic and fear.
Some currencies can also be considered safe-haven investments. Swiss franc can serve as a great example here. Its position is influenced by the stability of the Swiss government and its financial system. Low-volatility capital market, low unemployment rates, and positive trade balance add to the pool of advantages. Among other main factors influencing the safe-haven status of currency are also national market transparency and unambiguous regulations.
Japanese yen and the US dollar also tend to be described as safe-haven currencies. In the first case, one of the frequently mentioned reasons is that Japanese investors own a boatload of foreign bonds that give them tools to operate in times of uncertainty in favor of yen. USD is often described as a safe-haven currency because of the United States' overall economic and political power and the fact that the American dollar serves as the world's reserve currency.
What can also be interesting - art, wine, or collectibles can also be perceived as those unique types of safe investments. Gallus Pesendorfer – director of Sotheby's Cologne office – argues that there never really was a crisis in the art market. However, it is also crucial to note that different types of art can have different levels of stability when it comes to their market value. Pesendorfer stresses that people are more likely to offer the same price for some well-established artists, but the value of contemporary art perceived by the market can differ.
It shouldn't be overlooked that sometimes a safe-haven investment in one market may be a recipe for disaster in the other. People must be diligent while evaluating those kinds of assets.
But before you consider securing your finances with any of the examples above, guide your way with the thought that the number one safe-haven investment is an investment in your knowledge. It is essential to understand how particular markets work and to know the strengths and weaknesses of specific types of assets before starting to invest. This entirely complies with the wisdom from an absolute guru of investing, Warren Buffet: "The best investment you can make is an investment in yourself… The more you learn, the more you'll earn."
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