What is a safe-haven asset?
An asset is considered a safe haven when its value remains stable or tends to rise during major political, systemic or financial crises, such as the subprime crisis of 2008 or the health crisis the world is currently facing. Investors turn to this type of financial instrument in order to safeguard their assets as much as possible during periods that are not conducive to so-called risky investments.
The best known: gold
When you hear the term ‘safe haven’, even if you’re not involved in the world of finance, the asset most often mentioned is gold. Whenever there is instability in the world, gold is highly sought after because it acts as a safe investment, unlike financial investments such as shares. It is also unaffected by low or high interest rates. Gold is also very easy to sell, whether in the industrial sector or in jewellery, and supply is limited. The precious yellow metal reached an all-time high in 2020, with the price exceeding $2,000 per ounce.
The strength of the Swiss franc
The Swiss franc has always been a safe-haven currency, particularly when market instability arises. The currency’s main strengths lie in the robustness of the banking sector and the country’s thriving economy. Added to this is a very low level of debt compared to other OECD members and persistently low unemployment. Furthermore, its independence from the surrounding European Union adds an extra layer of appeal as a safe haven for capital, particularly when the EU is facing the full brunt of economic, political and health-related challenges.
Government bonds
A government bond is simply a debt instrument issued by a government that provides for interest payments. Government bonds from developed countries (particularly G10 members) are also highly sought after during times of instability, as the risk of government default remains minimal.
Is the yen a safer bet than the US dollar?
The Japanese currency has long been a safe-haven asset, arguably even more so than the US dollar, given that the yen tends to appreciate more than the US dollar during periods of instability. This reputation stems from Japan’s large trade surplus relative to its debt throughout the 20th century. Nevertheless, Japan’s public debt is the highest in the world, accounting for over 200% of Japanese GDP. Despite this, the yen remains a safe haven, as Japan remains a powerful economy and over 90% of the public debt is held by Japanese companies and households, which provides a degree of stability.
The US dollar, the most liquid currency
This confidence arose in the wake of the Bretton Woods agreements, which established a fixed exchange rate and effectively propelled the US dollar to become the world’s leading reserve currency. Then came the emerging market crisis of the 2000s, which further boosted the dollar’s value. Furthermore, the dollar is the most liquid currency in the foreign exchange market and simply symbolises the world’s largest economy today. However, the greenback is no longer considered a safe haven, and 2020 was likely proof of this. The DXY index, which is the benchmark index for the greenback against six major currencies—including the euro, which accounts for 57% of the total weighting—was shaken during this period. After rising to 103 in March 2020, the greenback’s strength has continued to fall throughout the pandemic, reaching as low as 89.20 in early January 2021.
Chart of the DXY index on 22 January 2021
Cryptocurrencies
We are going to look at cryptocurrency, and more specifically at Bitcoin, which has been cited during this crisis as a kind of safe haven. Just like gold, Bitcoin is completely independent of politics and stock markets. However, its extreme volatility (up to +40% in a single day) has so far undermined the notion that it is a safe investment. As you can see below, Bitcoin has continued to rise in value since the start of the year, particularly during the first and second waves of COVID. We must not overlook the fact that the US dollar has depreciated, making dollar-denominated financial instruments more accessible (cheaper).
Bitcoin chart on 22 January 2021
One final interesting point to note during this health crisis is that technology stocks (GAFAM, Netflix and Tesla) experienced a significant surge and were regarded as safe-haven assets during the first wave of the coronavirus. Their market capitalisation rose exponentially, reaching a point in April 2020 where they accounted for 50% of the total value of the Nasdaq index.
To sum up, 2020 was a particularly surprising year, and it has likely put an end to the US dollar’s appeal when the market is in risk-off mode. Conversely, new assets such as tech stocks and Bitcoin have fared well. The question remains, however, as to whether this type of financial instrument could become the new safe-haven assets, or whether we should simply consider 2020 to have been a one-off.
On the same topic
