Safe Haven Assets – Where Traders Go When Markets Get Risky

What Makes an Asset a Safe Haven

There's one property that determines the safe haven meaning, and it's that an asset retains or holds its value better than most others during the times of elevated market stress. When most other assets are falling together, this one (and a handful of others) stay put, and sometimes can even increase in price. This is why rotating into safe haven assets when you think the downturn is imminent can be a great value play.

There are three qualities that constitute safe haven assets. Those are:

• Deep liquidity. Ideally it would be so large that the flow from many other assets can move in, without causing massive slippage.

• Long track record of such an asset holding up during previous crises.

• Low or negative correlation to the 'growth' or 'hype' assets investors are fleeing from (typically equities, or popular crypto coins, for example).

Why Demand for Safe Havens Rises During a Crisis

When the markets are calm, money chases growth and yield. Whatever grows more, gets more popular. But when the uncertainty comes, or some geopolitical event strikes unexpectedly, growth assets are often the first ones to fall, sometimes quite drastically. This is why investors seek other assets to transfer their funds into. This shift is often called 'flight to safety'.

It is not that safe haven investments become more profitable. It's just that they fall less. So when the market is in the 'preserve money by any cost' mode, these assets become more popular. That in itself can raise their prices, and make them comparatively even more attractive.

Safe-Haven Currencies: USD, JPY, and CHF

When uncertainty spikes (banking crisis, interest rate hike, etc), the US dollar often benefits first. It has its role as the world's main reserve currency, and also has the deepest liquidity. So it's an easy choice during a flight to safety.

The Japanese yen works differently. Japan is a net creditor nation, so JPY is not in a strategic reserve of most countries. Instead, it's the home market that is the main driver here. Japanese investors usually hold a large amount of foreign assets (which are funded by cheap yen borrowing). When the markets are stressed, this trade unwinds: investors need to sell other assets, to transfer funds inside their country, to repay their creditors. This creates a buying pressure for JPY, and can make it stronger.

Swiss franc (CHF) is a different story entirely. Switzerland is famous for its political neutrality, and robust economy that can withstand pretty much any pressure. So when geopolitical shocks hit, and even the US with Japan doesn't seem safe, CHF can become the best safe haven currency in the eyes of the market. This is how the major currency pairs trade during these risk-off periods.

Gold as a Safe Haven

Gold has been seen as a store of value for thousands of years. This rich history gives it a trust premium. When everything else seems to fall, there's hardly a doubt in anyone's mind that gold will still be worth something. Physical, allocated gold has no counterparty risk, though that only applies to holding the metal itself, not to paper exposure like ETFs or futures, which still depend on a custodian or counterparty. There's no company that can meaningfully impact its price to the downside. So even if other assets fall in value, as various organizations sell them to try to cover their debts, gold can still retain its price, at least better than most.

Gold can also benefit from falling real interest rates, because there's no yield baked in it. The opportunity cost of holding it is decreasing as the interest rates elsewhere shrink. If you want to trade or invest in it, read our full guide to trading XAU/USD, which covers these mechanics in more detail.

Government Bonds: The "Flight to Quality" Asset

USD is considered safe, but it pays no yield, unless you put it into a bank deposit. However, during flight to safety, even bank accounts can be considered risky, at least above the guaranteed amount. In this case, a better option might be US Treasuries, German bunds, and similar high-grade sovereign debts. It's unlikely that these sovereign nations will completely default, and while they're not, investors can earn some interest on their funds, nearly risk-free.

The yield is modest, and typically not very attractive during the periods of rapid stock market growth. But when these assets are actually falling, bonds quickly become a part of consideration.

However, if a crisis is caused by fears over a government's unwinding, or bad inflation outlook for some country, that government's bonds can still fall, with equities of that market and its currency too. So bonds sometimes can be no safe haven at all.

Bitcoin's Contested Role as "Digital Gold"

Crypto people often argue that BTC can be considered a safe haven currency, as it has limited inflation and fixed max supply, as well as decentralized nature of the market. They argue Bitcoin can be equivalent to gold in some senses, as its isolated vs central banks or governments.

However, in practice, Bitcoin prices so far have not been holding up particularly well during market downturns. Quite often BTC was falling alongside the stock market and other 'growth assets', rather than rising against them. So the 'safe haven' nature of BTC is actually highly contested.

A closer look at how gold ETFs and Bitcoin ETFs compare shows that the correlation is rather moderate. Often the two rise at different times, and don't fall alongside each other. This is why, at least so far, Bitcoin has not been shown to work as an automatic hedge, even if that might change in the future.

Why Safe Havens Rotate Depending on the Type of Risk

Every crisis is different. Not all of them send fleeing capital to the same place. For example, if a crisis is rooted mainly in the US, such as debt ceiling, government shutdown, or unpredictable policies, this can weaken USD and US bonds. In such a case, it's more likely for safe haven currency to be JPY or CHF, and gold or raw resources would be seen as better safe haven investments than US stock staples.

A crisis driven by a hike of global interest rates, on the other hand, can favor cash-like instruments, such as the USD. This is why the type of risks markets are fleeing from need to be identified first, before choosing proper safe haven investments during this particular downturn. Tools like correlation trading, which track how different asset classes move against each other, can help confirm which rotation is actually underway. It's risky to assume that the same rotation will happen every time, on repeat.

A Worked Example: Reading a Safe-Haven Rotation

Say that equity indices are having a sharp daily drop, because some economic data came unexpectedly negative. Then, we can check the reactions different assets/currencies are having. Often it would be CHF and JPY strengthening compared to most currencies. Sometimes it would be gold prices rising or remaining the same.

In a broad risk off, bond yields would fall as well, and the dollar would be strong compared the currencies of emerging markets, but weak or mixed against CHF and JPY. If a trader is reading this rotation correctly, they could identify what's driving the current market session. Then, there could be opportunities to trade the counter-trend rallies, or apply cross-asset correlation trading logic to see which moves are conflicting, and where the outsized opportunities currently are.

Common Mistakes When Trading Safe Havens

• Assuming BTC will behave similar to gold (the historical record right now is rather mixed).

• Treating USD as a safe haven, if a crisis has a US-based root cause.

• Not checking what type of risk is driving this particular sell-off.

• Chasing the move when it has already run most of its course.

• Overleveraging into safe-haven assets under the assumption that their prices will rise (they may stay still, or may even fall, just less than the other assets).

Applying This on Pocket Option During Market Turbulence

Pocket Option allows you to trade currency pairs, including the yen and franc, which often have opportunities during market selloffs. There's also gold (XAU) and other precious metals, as well as Bitcoin and many altcoins. All of them are available to trade directly. You trade the price, so there's no need to own any of these assets, which can be a benefit if the prices are falling.

Pocket Option makes it possible for you to act during a safe-haven rotation, trading multiple assets and asset classes without the need to have different accounts or platforms. There's also a demo account with $50,000 in virtual funds, that allows you to check and refine your trading ideas without committing any real money.

Conclusion

How safe haven assets behave can vary significantly, and no market downturn is identical with the rest. Franc, dollar, gold, yen, bonds, Bitcoin each respond to different flavors of risk, and each of these assets can create outsized trading opportunities, as long as they're identified in time, and properly capitalized on.

Disclaimer: Trading involves risks, and can lead to loss of capital. CFDs and other leveraged products are not inherently safe. Consider whether you understand how they work before trading, and check any strategy on a demo account first.