All those economic roller-coasters seen since the global economic crisis of 2008 seem to have changed the way traders and investors think.
Before the crisis, they used to be focused on getting some decent return on their investments. The things have changed and now they are focused on avoiding risks and looking for safe-haven assets. Apparently, such an approach minimizes investor profits, not to mention th fact that this approach backs economic slowdowns worldwide. This has turned into a tendency. How can this tendency affect the global economy and financial markets? Which investment instruments will be considered safe-haven assets in th near future? Let's try to find the answers to these questions together with Masterforex-V Academy, Europe's best online Forex training project since 2009.
Indeed, the topic of financial security became so burning that experts finally gave it a name, calling it a «security trap». The experts say that the reason why this security trap emerged is the fact that contemporary investors are getting increasingly and excessively cautious while preferring to invest only in safe-haven assets (mostly bonds).
Well, this tendency is easy to explain: this is how investors react to financial crisis. Meanwhile, chasing big returns is now associated with price bubbles and risky assets. Well, the reaction to this situation is the exaggerated need for safe-haven assets.
Still, safe-haven assets cannot boast decent yields. At th same time, the higher demand for them goes, the lower yield they can actually pay.
So, why is this called a trap? The thing is that these efforts to chase safe-haven assets eventually lead to negative phenomena in the economy and may well result in prolonged economic recessions.
If a country falls into such a trap, along with minimizing interest rates, the country faces more negative consequences like a higher public debt along with a loss of the ability to create safe-haven assets. Consequently, the demand for such assets grows along with the declining supply for them.
A recession may reduce the demand for everything including safe-haven assets. During shady times, most investors prefer gold or at least cash (they cash out from stocks and commodities).
Still, recessions cannot be considered as a 100% solution allowing you to get out of the safety trap. Can US Dollar and gold help us to come out of the safety trap?
First of all, we can benefit from a higher public debt. More bonds increase the supply of safe-haven assets. A bigger debt is considered as one of the possible drivers for an economy fallen into the safety trap.
By the way, it should be noted that a couple of days ago, EURUSD confirmed a steady bullish trend. After retracing down to the lower border of the MF sloping channel around 1.3707, the currency pair found the bottom and rebounded from it up to 1.3880.
The current momentum isn't over yet, Masterforex-V Academy reports. The strength of the momentum is confirmed by 2 MF sloping channel. The closest level of resistance is last year's high at 1.3893. This is another major MF pivot. A break and consolidation above this high will confirm a long-term rally. If this is the case, the price may reach further highs.
Alternatively, the bearish scenario implies several levels of support which match the mentioned bottoms of 2 MF sloping channel. The price may well touch and rebound form them. There is another level of support down below – 1.3720.
Another variant is the Fed's method called quantitative easing (QE). QE means that the central bank lends to commercial banks, thereby transfering public assets to bank and companies' accounts. The supply of safe-haven assets increases, thereby allowing the government to avoid extra liabilities. This method also helps to accelerate the economy to an acceptable pace of growth/recovery.
At the same time, experts do not recommend using standard ways out of the safety trap – the promise of abstain form interest rate hikes. When being in a safety trap, such promises may stimulate the appreciation of risky assets amid more positive expectations associated with spending. Still, in such situations experts are not interested in risky assets. Therefore, abstaining from hikes is less inefficient unlike interest rate cuts or quantitative easing. On top of that, we should keep in mind that speculative bubbles inflated by low rates also fail to bring fruit under such circumstances (as a safety trap). Usually, they are capable of increasing wealth and accelerating the economy in question. However, when there is a safety trap, bubbles emerge in illiquid risky markets, which is certainly far from stimulating the economy. This is the paradox of a safety trap.
Meanwhile, gold and silver retraced form their 4-week price highs after Russia suspended the military exercises near the Russian-Ukrainian border. Market participants do not expect any further escalation of the Crimea issue. The chart below, courtesy of Masterforex-V Academy, reflects the current state of affairs in the market of gold:
Being guided by the safety-trap concept, experts are skeptical about the future of gold and the US dollar as safe-haven assets. Even if some expectations of investment security will be associated with the US Dollar, the state o the US economy will deprive the currency of the status of a safe-haven asset.
As for gold, it has been way too volatile and unpredictable since the 2008 crisis. This irrational behavior and investor attitude toward gold indicates how far it is from being a low-risk asset.
