At a time of great uncertainty, amid soaring inflation, forecasts of slowing global growth, and an international scenario that is becoming more complicated in the wake of Russian aggression in Ukraine, there is a growing tendency to shelter one’s investment portfolio by focusing on so-called “safe haven assets.”
These are those assets that have a value that is destined to last, even in times of economic recession, rising inflation or market turbulence.
Thus, we talk about assets such as precious metals or reliable currencies. Which serve to protect themselves and mitigate the volatility of other types of financial instruments.
Pros and cons of safe haven assets
Safe haven assets have an intrinsic value that tends to remain unchanged. Therefore, at times of greater uncertainty, when investors tend to shift to more stable positions, the demand for these types of assets becomes higher.
The downside, however, is that they are not very profitable.
Although they can offer a return, the primary objective of investing in safe haven assets is actually to protect oneself and preserve the capital invested while avoiding losses.
What are safe haven assets
They tend to be considered safe haven assets:
- all precious metals, such as gold, silver and platinum, and commodities in general;
- government bonds issued by the most economically sound countries, such as the German Bund and the U.S. Treasury. Indeed, the reliability of Germany and the United States is solid. And the two countries are unlikely to have difficulty repaying their debts when the bonds issued mature;
- currencies of reliable countries with tidy government accounts are seen as possible safe-haven assets for the same reason as the previous point. Examples are the U.S. dollar or the Swiss franc;
- real estate, especially high-end real estate, jewelry and works of art. But in the latter cases, specialized advice is appropriate so as not to fall into error.
Gold price today, what is happening?
The ultimate safe haven asset has always been gold, a commodity that offers protection in phases of high market volatility and when inflation rises.
Following the outbreak of the Russian-Ukrainian war, in fact, many investors turned to gold. Which in turn benefited from the rise in prices affecting all commodities.
Yet since its peak in March 2022, what has always been the ultimate safe-haven asset has since seen its price fall by as much as more than 20 percent.
The cause is the Federal Reserve’s increase in interest rates in an attempt to lower inflation. A move that has appreciated the value of the dollar and made purchases of U.S. bonds worthwhile.
In practice, at a time when interest rates are rising, gold instead is not generating income and investors can get higher returns from bonds and other safe-haven assets.