Safe Havens In A Crisis

In my earlier article I mentioned that are a few asset classes that are considered safe haven where people flock to during times of crisis.

I did also mentioned that we should hold uncorrelated assets to reduce our losses. As stocks plummet, other safe haven assets will rise in value which will help offset some losses.

However, in the recent days, there has been an interesting (or rather terrifying) development: Most of the assets that are considered safe havens are also joining stocks in a race to the bottom.

In other words, prices of safe haven assets are falling instead of rising.

It seemed like safe havens are in a crisis in times of crisis.

Why?

Let us look at these asset classes which are considered safe havens:

  1. Bonds
  2. Gold
  3. Bitcoin

Bonds – Security In Insecure Times?

In another earlier article, I mentioned that bonds are secure assets and investors often flock to them when stocks are falling. We did see it surge up on black Monday.

However, recently bond prices have been falling (I am referring to US treasuries and not the junk bonds) and having read this article and this article inspired me to write this post.

US government bonds are not likely to default anytime soon so it is unlikely that it is because of a default risk. In fact, the Fed had announced a massive 700 billion bond purchasing to reduce the interest rates to zero.

This is probably due to huge government bonds sell offs because fund managers and investors are liquidating and redeeming funds to get cash.

It is also happening at home in Singapore. I first noticed it last week when the Singapore ABF bond ETF dropped and I posed a question in the seedy forum because I found it unusual.

Investors all around the world are selling and cashing out from their bond positions.

All That Glitters Is Not Gold?

Gold also took a turn and dived to the bottom. Just like bonds, it surged for the past few weeks to a high of $1700 and then fell suddenly this week.

Gold acts as protection against inflation. It does not help that governments around the world had flooded the market with money via quantitative easing.

An increasing supply money with a low supply of goods (due to COVID-19 disruption on global supply chains) should be a recipe of inflation.

So, a combination of lower increase rates and inflation should fuel gold’s rise. Surprisingly, the opposite happened.

Again, the explanation for the falling gold prices is due to investors cashing out.

Bitcoin – Digital Gold?

During 2018 and 2019 during the US China trade war, when stocks were declining, Bitcoin and gold were rallying.

Bitcoin was thus also considered digital gold – a safe haven equivalent to gold.

At least, until COVID-19 happened.

Bitcoin’s reputation as a safe haven is plummeting along with its value.

Given the influx of money everywhere around the world, governments are pouring money into the economy, devaluing currencies everywhere, bitcoin’s value should be stable because its supply is fixed.

Bitcoin is still very speculative in nature and hence I am not surprised by the wild swings in prices.

Again, people are moving out of digital cash and accumulating as much physical cash as possible.

Cash Is King

Business are disrupted globally and people’s livelihoods are affected due to COVID-19.

In situations like these, people are thinking of survival.

When the supply of hand sanitizers and toilet papers are dwindling, you start to panic and begin to hoard as much as you can.

Similarly, when your cash flow has an increased risk of drying up, you would also want to accumulate and save as much of it as you can.

They are not thinking of investing in the long term. What good does it do to hold on to bonds if they do not have enough money to put food on the table?

Cash is more liquid and practical for short term needs.

Businesses would also need to hold cash to make sure they stay afloat as operations get disrupted. Having a huge reserve of cash will help them tide through lean periods.

In times like this, cash is king.

That is why it is always important to have adequate money saved in an emergency fund to help tide through the difficult times.

Conclusion – Are Safe Havens In A Crisis?

When the situation turns dire, you may be forced to sell your safe haven assets for cash because you will need to survive this period first.

If enough people are liquidating their assets all at the same time, it may cause prices for these assets to plunge.

Another important observation from this incident is that in times of crisis, assets that were previously uncorrelated increases in correlation with all other asset classes.

It is the perception of the investors that determine the value of assets. So during periods of extreme volatility, the correlation tend to increase because investors are nervous about the financial markets as a whole.

So no matter how diversified your portfolio is, you must be prepared to expect losses.

So, Are There Other Safe Havens In A Pandemic?

The only other safe haven in this pandemic is your home, away from the crowds. Unless if someone in your household is sick.

Practice social distancing. We can all do a part to help stop it from spreading further.

The only valuable assets in a pandemic are your health, daily essentials and your family.

It is also important to keep enough cash reserves.

So stay healthy and hopefully the crisis will be over soon.

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Author: Fatty's Finance

Finance is like health. It becomes an issue if it is not well maintained. I want to help you get back in shape!

6 thoughts

    1. Hi, agreed. Bitcoin is too speculative. I considered Bitcoin as a safe haven here because of some opinions I have been hearing out there that it is equivalent to digital gold. But recent events had shown it false.

      1. Stock market drop 25%? If recession prolon till year end, possible add on another 30% decline or even more?

      2. Stock market drop 25%? If recession prolon till year end, possible add on another 30% decline or even more?

  1. Stock market drop 25%? If recession prolon till year end, possible add on another 30% decline or even more?

    1. Yes. It is possible to decline even more. Now, the central banks and governments had responded with stimulus measures. We still need to wait and see the extent of the economic impact of COVID on the economy. They have put out the fire, now we will have to assess the extent of damage caused by the fire that is COVID.

      For me, I will continue to dollar average down because I will never know how far it could potentially drop (or rise).

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