How to trade Safe-Haven Assets

Yagub Rahimov | May 03, 2018
How to trade Safe-Haven Assets
Event details

Each time the global economy sees any type of distraction financial media immediately jumps in safe haven assets while analysts globally start commenting about how to trade safe-haven assets.

A week after infamous Brexit vote, the market is still being shaken by the news coming from the EU and the UK, forcing more and more industry players comment about the importance of trading safe-safe haven assets.

Although there are a number of different safe haven-assets, Gold is the leading save haven-asset. Why investors trade gold generally, could be classified into 3 categories:

#1 Diversification

As the mother of the financial industry Gold is often seen as an alternative to paper money. Hence gold is traded based on one of the most commonly used principle of trading and investment: diversification.

Diversification trading is generally based on correlation, where Gold has inverse correlation with the USD index and stock market. As an example, you can look into the 2008 financial crisis, when stocks tumbled globally while gold prices soared as investors moved to safety. On the opposite side, as the US economy grew towards 2015 and the USD strengthened Gold started depreciating.

#2 Geopolitical Uncertainty

Gold is known as a crisis commodity as it is seen as the king of the safe-haven assets since in times of massive global tensions (e.g. Brexit, Financial crisis, etc..) investors tend to move their funds to gold and gold certificates. Crisis commodity title makes gold an important hedging tool against major global geopolitical instability.

#3 Inflation Hedge

Inflation is one of the key objectives of every central bank globally. Indeed, you would see the FED, ECB and most importantly the BoJ non-stop commenting about their low inflation levels in their economies.

At the moment, the average inflation target for central banks globally is set around 2%. Inflation targets at 2% level indicate that our paper money is designed in a way that it should lose its face value by 2% per year, while gold as a fixed asset can not lose its face value. 1 gram of gold will still be 1 gram of gold in a years time. Hence, Gold is therefore one of the best financial tools to hedge against major global financial issues, especially inflation fears.

The price of gold would tend to rise when inflation goes up. To give you a better understanding since the WW2, inflation has peaked in 1946, 1974, 1975, 1979, and 1980. During these years, the Dow Jones index returns were capped at the level of 12% while gold returns averaged well above 130%.

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Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ, nor should they be attributed to AtoZMarkets.