Safe Haven Investments
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Global Asset Management investment advisors have been receiving calls this week from clients concerned about global risk. Having a petulant neighbor, people in Seoul, South Korea are accustomed to issues of geopolitical risk. However, recent events in the news have some clients thinking about how best to protect their assets if financial markets become unstable.
Most periods of chaos and uncertainty are short-lived. Properly diversified portfolios will weather most storms. However, everyone has a different tolerance for volatility and some clients feel better moving a portion of their wealth into safe haven assets during periods of uncertainty.
What Defines a Safe Haven?
Safe havens are like ports in a storm. They are investments that hold value when financial markets are turbulent. Certain defensive investments will even rise during market downturns and periods of uncertainty. Different safe haven assets will perform differently in response to various situations. As always, it’s best to speak to your Global Asset Management investment advisor before making rash decisions in a panic.
How Do Safe Havens Protect Me?
Safe haven investments perform different purposes. One is protecting the value of one’s wealth. Another is to ensure one has portable stores of wealth. Threats to the value of wealth can come from hyperinflation, market corrections, economic downturns and geopolitical instability. One person’s definition of a safe haven may be something they can touch or carry. Another’s may be the anonymity of digital currencies. While there is no one-size-fits-all, there are established and traditional safe haven assets.
Alternative Investments Scam Alert
Alternative assets refer to most investments beyond the traditional classifications of stocks, bonds, cash, gold and T-bills. Hard assets – things you can touch or carry – sound appealing in times of uncertainty. Panicky investors can be easy prey for fraud and scams. Art, precious gems and vintage wines can all be sound investments if you know what you are buying and dealing with a reputable expert. If not, buyer beware.
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Gold is the classic safe haven investment. It’s a physical commodity with a universally acknowledged value. Unlike paper currency, governments can’t magically create gold which is why it’s a hedge against inflation. Within limits, it is a portable store of wealth, and untraceable. Physical bullion is the foremost protection against uncertainty. Large-cap gold stocks can also play a role, since they rise in value during periods of uncertainty, along with the price of their main product. Gold stocks are a great choice for long-term investing. Over time they earn more than bullion.
Cash and Near-Cash
Over the long-term, cash is a poor investment. It generates no returns and its value is eroded by inflation. Over the short-term, its value is less vulnerable to financial shocks or market corrections. Near-cash refers to money-market assets that mature quickly and can be converted to cash easily. These include government treasure bills, guaranteed investment certificates and money-market funds. U.S. T-bills are actually safer than large amounts of cash. In the event of a complete financial collapse, they are fully guaranteed by the government. Banks and investment firms have insurance to protect investors, but only up to a limited amount.
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Currencies: USD, Yen and the Swiss Franc
The forex market is massive and volatile. Liquid capital flies around the globe, flitting between safety and extra yield. When markets are stable, money flows to the Australian dollar and the New Zealand dollar, which provide additional return without significant currency risk. During times of uncertainty, money flows to the U.S. Dollar, the Japanese Yen and the Swiss Franc.
The Swiss franc is a classic safe-haven currency. Switzerland is neutral, stable, and independent, as well as home to a large and sound financial system. Their status as a tax haven means there is enormous liquidity within their banking system.
Japan is a stable country with a large economy and ample liquidity. It consistently maintains current account surpluses, a stable economy and a liquid capital market. Money does leave the country in search of higher yields during periods of stability, and it rushes back when times are uncertain. For example, the sterling-yen is a forex favorite whenever Brexit issues rock markets.
The United States is the world’s largest economy, and the U.S. dollar is the world’s reserve currency. During volatile and uncertain periods, cash flows into U.S. dollars, and to some extent now, the Euro.
In some corners of the globe, cryptocurrencies are joining the ranks of safe havens. The gold standard in the digital world is the Bitcoin. South Korea was one of the first widespread early adopters of cryptocurrency use. Countries with the highest level of use now are Turkey, Brazil, Columbia, Argentina and South Africa. Expect this trend to continue in countries with currency restrictions and rampant inflation.
At Global Asset Management, safe haven investments are considered one of several risk management tools. If your country of residence is stable, the most effective way to lower risk is adequate diversification of quality investments.