What Are Safe Havens?
Good day traders and welcome to another blog post by AspireFX. You may have seen or heard the term safe haven before but have yet to understand or fully grasp the concept. It’s especially important to understand the role save havens play when analyzing the market as it can be used as a extra confluence when analyzing and trading certain pairs.
A safe haven is an investment that holds it’s value or even increases in value during times of market volatility, while other assets may be losing value. Safe havens offer investors protection against huge market downswings however they may react differently in different market conditions. With the markets being as turbulent as they are because of the worldwide pandemic, let us focus on the most historic save haven, Gold (XAUUSD).
Why is there so much upward momentum?
Looking at Gold on the daily time frame we can see that the overall structure is bullish. The first upward pointing arrow shows when China officially announced the coronavirus outbreak. The second upward pointing arrow is showing exactly where price was when the World Health Organization declared the coronavirus a global health emergency. As more coronavirus cases were recorded and reported worldwide, there was a massive push to the upside which saw Gold reach $1700 per ounce for the first time since 2017. This is an example of how investors pump money into safe havens in order to protect their investment portfolio during times of uncertainty. As traders we need to be in tune with where investors are putting their capital in order to profit off of the market. Shortly after we reached the high, there was a major sell off which will be discussed later but from the low of $1450 we recovered fully and went on to record new highs for 2020. Looking at the highlighted region, we can see how the previous level of resistance has now turned into support where price has rejected numerous times, proving that 1700 is still an attractive region for investors to put their money into Gold.
What caused such an abrupt sell off?
As mentioned before, safe havens behave differently in different market conditions. Even though the reason for Gold reaching $1700 was mainly because of the coronavirus outbreak and the fears of what the potential impact would be, we still had a major sell off because equity markets (stocks) had taken one of the steepest dips in recent years. Looking at things from an investors point of view, keeping in mind that they hold positions in many different markets, in order for them to cover their losses incurred in the stock market, they had to close out long term safe haven positions in order to prevent their investment portfolio from suffering. Once the stock market stabilized due to monetary policy being implemented, Gold then recovered fully and again began acting as a safe haven once again which is why we are seeing it maintain it’s bullish trend.
A break down:
Looking at Gold on the 1 hour time frame starting at June 10, we can see the that there was a lot of sideways movement where we continuously found support around 1710 whilst still obeying the descending trendline. Once we broke out of that area of consolidation, we formed a higher high at 1758, pulled back to the highlighted region which lines up nicely with the 50% Fibonacci retracement level as well as previous resistance. We could potentially pull back to the highlighted region again before we see this pair reach 1780 as suggested by the Fibonacci tool. However, if we fall through the highlighted area, we could look at a retest of the trend line for further upside movement.
Be on the lookout for any updates regarding newly recorded coronavirus cases which could indicate a possible second wave of coronavirus as countries worldwide begin to ease lock down restrictions. From the dollar perspective, the main news events to lookout for will be the final estimate of the first quarter GDP, the Purchasing Managers Index as well as the PCE Price Index. As always trade safe, ensure you use correct risk management and please subscribe to receive these blog posts instantly.