When it comes to the stock market, there have been a lot of “worsts” in 2022, from the worst January since 2009 to the worst quarterly decline in two years. Now, with interest rates skyrocketing, inflation at a 40-year high and experts predicting increasing likelihood of recession in the next two years, investors are looking to safe haven assets to mitigate risk.
Definition
A safe haven is a type of investment that is expected to retain or increase in value when the market is turbulent.
In order to qualify, it needs to be uncorrelated or negatively correlated to the market, meaning it doesn’t mimic market moves.
Types of safe havens
Gold is one of the most well-known safe havens. The financial crash of 2008 is a perfect example of its performance under pressure. While markets were a bloodbath, gold went from about $700 an ounce in late 2008 to touching $1,900 by 2011. Finite supply and healthy demand for this safe haven helped drive up prices.
In recent years, gold has been getting some competition from the cryptocurrency space.
“Bitcoin is the best safe haven treasury reserve asset in the world right now, and it’s engineered to be superior to gold in all aspects,” MicroStrategy CEO Michael Saylor said in late 2020 after moving some of his company’s reserves into Bitcoin.
Bitcoin enthusiasts call the cryptocurrency “digital gold” and argue it too is a safe haven. But lately, it’s failing the correlation test as its sensitivity to the stock market increases.
Other safe havens when the markets are shaky include government-backed securities; currencies like the Japanese Yen, Swiss Franc and U.S. Dollar; and defensive stocks. Defensive stocks are shares of companies the population can’t live without regardless of how the economy is doing, from industries like health care, utilities, food and beverage.
Another safe haven option is cold hard cash, but when inflation is sky high, that’s losing value too.
When it comes to safe havens, it’s important to note that every downturn is different, which means what’s safe can change with the tide.
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