Resilient refuge assets serve as a crucial remedy during economic downturns. They embody the market sanctuaries that shield traders and investors from losses amidst equity declines. Peruse ahead for our compendium on the finest safe-haven assets to select, their fortifying effect on your portfolio, and expert advice for trading these invaluable bastions.
WHAT ARE SAFE-HAVEN ASSETS?
Safe-haven assets are a sanctuary for investors and traders, a bulwark against profound turmoil. These haven currencies, sanctuary stocks, gold, and US Treasuries have a track record of preserving or augmenting their worth amidst downturns or turbulent markets, providing a shield against potential losses that growth equities might encounter in such circumstances.
Safe-haven assets typically possess the following distinctive features:
1) High Liquidity
With substantial trading volumes, one can conveniently enter or exit positions without encountering slippage. A prime illustration of a highly-liquid safe-haven currency pair is GBP/JPY. During times of fundamental disruption like a Western recession, traders often opt to go short GBP/JPY to potentially profit as the price declines further.
2) Limited Supply
Assets facing an imbalance between supply and demand tend to lose value. Assets like gold, with scarce supply, derive value from this scarcity, and demand can surge when needed. The forces of supply and demand play a significant role in this aspect.
3) Varied Utility
The asset's versatility, particularly in industrial applications, contributes to its substantial demand. For instance, copper is extensively utilized in infrastructure and agriculture, and its demand often rises as emerging markets emphasize development.
4) Enduring Demand
A genuine safe haven should retain future demand, instilling confidence in its long-term utility. Although certain commodities like silver have numerous current industrial applications, there may be replacements in the future, impacting their demand.
5) Permanence
Assets vulnerable to quality deterioration might experience decreased demand as their utility diminishes over time.
THE TOP SAFE-HAVEN ASSETS TO TRADE
When considering trading safe-haven assets, individuals have the option to select from various instruments, including currency pairs, US Treasuries, commodities, and resilient stocks. In this context, we shall explore a selection of the prevailing safe-haven assets suitable for trading endeavors.
GOLD
Gold, the prized safe-haven commodity, exhibits a strong and reliable inverse relationship with stocks. This precious physical asset, in great demand, remains unaffected by monetary policy decisions and boasts a limited supply.
Back in 2009, investors swarmed towards gold amidst the financial crisis, igniting a three-year bullish trend that eventually propelled the price to an impressive $1,900 per ounce by August 2011. While the metal experienced a fervent surge in the subsequent two years, any prolonged downward market movement was short-lived, solidifying its revered safe-haven status. The chart below provides an overview of the primary price fluctuations since the beginning of the 21st century.
JAPANESE (JPY)
JPY is renowned as a dependable safe-haven currency due to its trade surplus and status as a net creditor to the world, making it highly sought after in currency carry trade transactions, further fueling the self-fulfilling prophecy. The chart below illustrates three distinct occasions spanning three decades where the attractiveness of JPY as a secure haven is evident in risk-averse markets.
DEFENSIVE STOCKS
Amidst broader market turbulence, growth stocks may experience declines, but certain resilient safe-haven stocks have the potential to maintain or even grow in value during economic downturns. These chosen companies, operating in sectors like consumer goods and utilities, provide products and services that remain in high demand even in challenging financial conditions. The illustration below exhibits three instances of how McDonald's navigated through difficult economic periods in the 21st century.
US TREASURIES
US Treasuries are deemed sanctuaries owing to their unassailable quality; the authorities reimburse these financial instruments upon their full term.
SECURE INVESTMENTS IN SAFE-HAVEN ASSETS
Having identified the markets to trade, the question remains: how do you ensure safe and strategic trading? Markets follow cycles, so traders should carefully analyze the prices of assets like growth stocks, the US Dollar Index, and major industrial commodities. Additionally, it's crucial to pay attention to fundamental factors such as employment data and GDP, which provide insights into the economy's performance. This knowledge will help you anticipate potential downturns and decide when to shift a portion of your portfolio into defensive assets.
For instance, three indicators that may signal an impending downturn include:
1. Inverted Yield Curve for US Treasury Bonds: Although not a guarantee, an inverted yield curve has historically preceded recessions.
2. Weak Business/Consumer Confidence Data: When confidence in the economy wanes, businesses and consumers are less likely to spend or invest, leading to contractions in growth and potential downturns.
3. Negative Employment Statistics: Employment figures not only reveal hiring intentions but also the number of hours worked. Reductions in hours or an increase in temporary workers might indicate nervousness about the state of the economy.
SAFE-HAVEN ASSETS: CRITICAL CONSIDERATIONS
Stay Informed on Fundamentals: Monitoring employment statistics and business confidence, among other fundamental factors, can help predict market downturns and economic trends. Keeping a close eye on these indicators will guide you in making timely shifts into and out of safe havens.
Use Technical Indicators: Technical indicators like the Relative Strength Index (RSI) can identify overbought or oversold assets. Combining these indicators with fundamental analysis offers a clearer picture of when to enter or exit trades.
Respect Historical Price Action: Bear in mind that safe-haven assets may not always behave as expected. For instance, during the 2008 financial crisis, gold was expected to soar, but banks chose to cash in reserves for dollar liquidity. The bull run for gold only began the following year.
Follow for more: TradNx
Tags:
Basis-of-Macroeconomics