Safe haven assets and examples in investing
What are they, and why do investors consider them when markets are unstable?
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If you’re new to investing, you may be wondering, “What are safe haven investments?” On this page, we’ll discuss what safe haven assets are, why they’re often viewed as more stable, and why some feel they might help reduce risk and preserve capital during periods of market volatility.
Key takeaways
A type of asset that tends to hold its value during market volatility and economic downturns (although no investment is completely risk-free).
What is considered a safe haven for investments depends on the nature of the market, but commonly mentioned examples include gold, government bonds, and certain currencies.
Investors typically use safe haven assetsto diversify their portfolio and help reduce risk during uncertain times (although they aren’t a guarantee against loss).
What are safe haven assets?
The term ‘safe haven asset’ is often used to describe types of investments that are seen as more stable during times of economic downturn or geopolitical uncertainty.
Frequently cited examples of safe haven assets include gold, government bonds, and currencies like the Swiss franc or Japanese yen. Investors might seek out these types of assets during times of market volatility, inflation, or financial uncertainty.
Some of the criteria that might lead to an asset being deemed a safe haven include:
Stable: Maintains value when other assets are declining.
Liquid: Easy to buy and sell, even in turbulent markets.
Low correlation: Moves independently from riskier assets.
Globally accepted: Widely traded and trusted across markets.
Limited supply: Growth of supply doesn’t outweigh the demand.
It’s important to note that the term “safe haven” is used broadly within the financial industry and doesn’t guarantee risk-free performance. What is considered safe is also highly context-dependent and may vary depending on the nature of the crisis. Investors might consider conducting their own research so they have a complete understanding of the risk involved with any type of investment.
Here’s an overview of the assets that typically fall into this category.
Gold | It historically holds its value and is often used as a hedge against inflation and currency devaluation* (although its price can still fluctuate). |
U.S. government bonds | Backed by the U.S. government, and among the most liquid assets globally, they’re widely considered low-risk. Like all investments, they’re not risk-free and their value can change depending on interest rates and market conditions**. |
UK government bonds/gilts | It’s backed by the UK government, and often considered a stable store of value and a trusted option in times of economic or market uncertainty (though it’s not on par with the U.S. Treasury in terms of global perception). |
Cash and cash equivalents | It retains face value even in market downturns, although inflation can erode value in real terms. |
Swiss franc | It’s seen as a very stable currency due to Switzerland’s strong economy and political neutrality. |
Japanese yen | It’s viewed as a ‘safe’ currency due to Japan's strong current account surplus, political stability, and history of low inflation. |
What is the safe haven theory of finance?
The safe haven theory of finance refers to the idea that in times of crisis, investors may prioritise stability over returns. They might opt for assets that are believed to be more resilient during periods of market uncertainty.
As certain assets have low or negative correlation with the broader market (i.e. their prices move independently or inversely to market trends), these assets may offer some protection when riskier investments are falling.
During events such as the stock market crashes of 2008 and 2020, geopolitical conflicts, and other times of economic downturn, observers have noted shifts towards gold, U.S. Treasury bonds or strong currencies. What qualifies as a ‘safe haven’ can vary widely depending on the market situation and the investor’s own view of risk.
Safe haven assets and inflation
Safe haven assets are often considered during periods of fluctuating inflation, as investors look for ways to help preserve purchasing power when the value of money declines.
When inflation is low and stable, the purchasing power of money (how much you can get with your money in real terms) remains relatively steady. Interest rates also tend to be lower, which can affect how investors perceive attractiveness of certain assets.
However, during periods of high inflation, money tends to lose value more quickly. For example, cash and fixed-rate investments can lose real value if inflation outpaces their returns. This can drive investors toward assets that they believe may maintain or grow purchasing power instead.
Safe haven assets may be seen as a way of protecting wealth during these times, as investors seek assets that maintain value or appreciate in real terms. It’s important to note, though, that the performance of safe haven assets can vary during times of inflation. For instance, while gold might have risen in value during some inflationary periods in the past, cash may have lost purchasing power. Past performance isn’t a guarantee of future performance, either.
Are REITs considered safe haven assets?
While gold, cash, and government bonds are often seen as safe haven assets, some investors also look to REITs (Real Estate Investment Trusts) for their potential stability, especially in low-interest-rate environments. REITs generate income through holding real estate, and are known for offering regular dividends. They’re sometimes viewed as offering some protection against inflation as property values and rents may rise over time. However, because they are tied to the broader property and stock markets, they may not offer the same level of security during extreme financial crises.
Therefore, while REITs can provide some protective qualities, they are not traditionally classified as a safe haven investment.
Safe haven assets and the stock market
Historically, some safe haven investments have shown an inverse correlation to the stock market, especially during periods of volatility or downturns. When the stock market falls, safe haven assets may rise in value as investors move their money into assets they consider more stable. For example, during the 2008 Global Financial Crisis, when stock markets fell, gold prices surged.
As mentioned above, not all safe haven investments are guaranteed, and perceptions of what qualifies as a safe haven asset can change over time. In extreme global stock market fluctuations (like in 2008 and 2020), even safe havens can experience short-term volatility as investors quickly sell off assets.
Why is gold called a safe haven asset?
Gold is often described as a safe haven asset due to its reputation for relative stability in the market. It tends to maintain or increase in value even in times of economic uncertainty or financial market volatility, although gold’s value isn’t uniform or guaranteed (and can still fluctuate). In the United States, for example, uncertainty over cuts to Federal Reserve rates caused gold prices to rise. Unlike paper currencies or stocks, gold has a long history of being used as a store of value.
Historically gold has sometimes gained when:
Inflation was high, prompting investors to turn to gold to preserve purchasing power.
Stock markets fell, as gold may rise or remain stable despite equities declining.
Geopolitical tensions rose. Wars, conflicts, and political instability can push investors towards gold as a safer store of value.
Currency values weakened. When confidence in a major currency drops, gold often gains as an alternative.
These trends are not universal, however, and gold’s performance depends heavily on the wider economic context.
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