In June 12, 2018, the United States and North Korean leaders held their first meeting in decades. The meeting was set to address the issue of nuclear issues in the Korean peninsula.
The meeting coma after the US president and the North Korean supreme leader exchanged harsh words before. Their statements led the world to a near nuclear war, especially after North Korea delivered quality nuclear weapons that could reach the US.
The language changed and the North Korean leader moved to ease the tensions. He asked the US president for a meeting to discuss what he called the complete denuclearization of the Korean peninsula.
This meeting was very important not only to North Korea but to the world. If it works, it will be a good day for the world peace. If it fails, it will be a difficult day for the two countries and the world.
Traders followed closely the ongoing happenings. As such, the need for safe haven assets will be important.
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Characteristics of a Safe Haven Asset
- Limited supply: Scarcity of the asset is what maintains its high value.
- High liquidity: This means that one’s investment into such an asset should be easy to convert into cash.
- Sustained demand: Safe haven assets are irreplaceable with other forms of investments. To maintain this status, the asset’s demand should be consistently high.
- Permanence: A safe haven asset should not be subject to loss of quality in ways such as decay. At the same time, it should be of high performance in the long-term in order to maintain its high demand.
Assets that are referred to as safe havens
Gold is a metal that has been in use for centuries. All historical books mention the importance of gold. Today, gold has no major industrial use. Its only use is in the investment world where governments hold it for investment purposes.
Traders use gold as a safe haven because they believe that if there is an Armageddon, its value will climb. In fact, the price of gold tends to move up as the dollar and the markets fall.
For instance, in August 2020, prices of the yellow metal reached an all-time high of about $2074.The upward momentum was fueled by the rising coronavirus cases. Investors were shifting their resources to gold to insure their wealth against the economic crisis.
In addition to being an industrial metal, silver is a precious metal. Just like gold, investors consider it as a safe haven, store of value, and a reliable hedge against inflation. While it is possible to purchase silver in the form of coins or bars, the more reliable option is via ETFs or a futures contract.
In 2020, silver prices rose by about 50%.
As the world’s reserve currency, investors often store their wealth in the dollar during economic or geopolitical crisis. For instance, as soon as the WHO announced COVID-19 as a global pandemic in March 2020, the greenback hit a 3-year high of around $103.
Investors love certainty. They always want to know that their money is safe. As such, they try to lend the cash to the government because they are always certain that the government will pay the money back.
However, the yields on these bills tend to be low because of the certainty. However, this certainty often reduces when there are major geopolitical issues. This leads the yields to rise.
Japan is located near the Korean peninsula. As such, it is often ironic that a country that is very close to the Korean peninsula would be considered a safe haven. The reality is that if there is a crisis in the peninsula, there would be demand for the Japanese yen.
This is because of the vast holdings Japan owns overseas. For example, Japan is the second largest holder of US debt after China. This makes the yen a better currency to hold over the dollar because the yen would see more demand.
Switzerland is one of the most unique country in the world. While it is in Europe, the country avoided joining the EU. Earlier on, it took a neutral stand on the two world wars.
The country does not have a lot of natural resources but what makes it unique is its financial system. A good number of the world’s wealthiest people are known to stash their wealth in the country because of its lax regulations.
Finally, cash is a good safe haven. This is because in dark days, other assets might not be readily available. For example, in case there is a major issue, it would be difficult to convert other assets into cash.
As such, cash is always king and as a trader, you need to have a good part of your portfolio in cash.
The downside of safe haven assets
While safe haven assets are an apt inclusion in your investment portfolio, they are not always safe. The volatility of the market during certain scenarios makes it impossible to bet on safe haven assets in totality.
For instance, as the coronavirus pandemic took shape in March 2020, gold prices dropped to around $1450. Investors who had shifted their resources to the precious metal during this phase incurred hefty losses.
External useful Resources
- How Safe Are Your Safe-Haven Assets? – Forbes